Final answer:
Depreciation allowed, but not deducted, on the asset reduces its basis. Maintenance and repair costs do not decrease the basis as they are treated as current year deductible expenses.
Step-by-step explanation:
Of the choices given for what reduces the basis of an asset, the correct answer is: C. depreciation allowed, but not deducted, on the asset. The basis of an asset is its cost plus any additional expenditures that should be capitalized. The basis is decreased as the asset is depreciated, to account for wear, tear, and obsolescence.
While depreciation actually deducted does indeed reduce the basis of an asset, in the context of tax regulations, the Internal Revenue Service (IRS) stipulates that it is the depreciation allowed, whether taken or not, that must be used to reduce the basis. Maintenance costs and ordinary repairs, although may be deductible expenses for tax purposes, do not reduce the asset's basis. They are considered current expenses and are deducted from the income of the year in which they are incurred, rather than capitalized.