2013-Fall-Stanley-Characterization-Income-Expenditures-Answer

2013-Fall-Stanley-Characterization-Income-Expenditures-Answer

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ID: 10: Exam Name: Grade: Characterization_(Stanley)_l3FL Golden Gate University School of Law (Exam Number) Characterization_(Stanley)_ 13FL Page 1 of 1 U \ 4l\s-o &1- 4{?(~0 Exam taken with SofTest v11.0.270.93938
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ID: Characterization_(Stanley)_l3FL 1) ========Start of Answer #1 (1105 words)======== Section 162 of the I.R.C. provides for a deduction of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. I.R.C. §162(a). In order to be deductible, the expenses muyst be 1) paid or incurred during the taxable year; 2} for carrying on a trade or business; 3} an expense (as opposed to a capitalized expenditure; 4} a necessary expense and 5) an ordinary expense. Section 263 provides that no deduction shall be allowed for "any amount paid out for new buildings or for permanent improvements or betterments made to increase t~e value of any property or estate." I.R.C. §263(a)(1). The primary effect of characterizing a payment as either a business expense or a capital expenditure concerns the timing of the taxpayer's recovery of the cost. Business expenses under §162 are currently deductible in the year they are made. Capital expenditures must be amortized or depreciated over the life of the asset, or added to the basis of the asset and recovered when the taxpayer sells or disposes of the asset. The purpose is to try and match expense with the revenue they generate. Expenses that generate current revenue are deductible in the current year, while expenses that will have benefit over multiple years are capitalized. Page 1 of 6
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(Question 1 continued) ID: Characterization_(Stanley)_13FL Expenses of Buying Land, Warehouse. Construction of New Parking Garage, Repaving and New Signs Expenses for new buildings or permanent improvements or betterments to buildings may not be deducted and must be capitalized. I.R.C. §263(a)(1 ). Examples of capital expenditures include amounts paid to acquire or produce a unit of real property and amounts paid to improve a unit of real property. 26 C.F.R. 1.263(a)-1T(c)(1) and (2). The $1 million spent to buy the land and old warehouse are capital expenditures ~,nu.-se .. · pursuant to §263. 'i ~mount must be allocated between the land and the building, and no depreciation may be taken on the building. Similarly the $250,000 to construct the new garage must be capitalized and may be depreciated. b ewu.se.. ... An expense if for a "repair" if it is meant to restore or mend, to keep the property in an ordinarily efficient operating condition. Midland Empire v. Comm. As long as the repair does not materially add to the value of the property nor appreciably prolong its life, it may be deducted as an expense.
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  • Fall '
  • Hendrickson
  • Depreciation, Capital Expenditure, Expense, Employee Benefit, Generally Accepted Accounting Principles, Operating expense

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