Final answer:
The statement is true; cost recovery like depreciation must be subtracted from an asset's basis, which reflects the decline in value over time and is crucial for calculating gain or loss on a sale.
Step-by-step explanation:
The statement that the basis of cost recovery property must be reduced by at least the cost recovery allowable is true. In tax accounting, cost recovery refers to depreciation or amortization deductions claimed on a property. When a taxpayer claims these deductions, they are meant to represent the property's decline in value over time. The basis, or the taxpayer's invested capital in the property, must be reduced each year by the amount of depreciation taken. This adjusted basis will then reflect the undepreciated cost and is crucial for calculating gain or loss upon the property's eventual sale.
In other words, if a taxpayer does not reduce the basis of an asset by at least the allowable depreciation, they might end up paying less in taxes initially but could face a larger tax bill when the asset is sold, as the taxable gain would be larger.