Friday, February 22, 2013

Tax File Memorandum: Megacorp, Inc

November 13, 2011
TAX FILE MEMORANDUM
FROMAnnon
SUBJECTMegaCorp, Inc. and Business Expense
Today I spoke with our client, Peaceful MegaCorp, Inc. regarding their recent audit notice from the IRS. They essential to know if the IRS is correct when they told MegaCorp, Inc. that they couldnt characterize the $5 million stipend to Ideas, Inc. as needed business expense. Instead, they need to characterize it as a jacket crown expenditure, so they wont be able to start this conciliatement.
FACTSMegaCorp, Inc. purchased a union called Little, Inc. including all their assets and liabilities. Prior to the purchase, Little was complex in a patent aggression with Ideas, Inc. MegaCorp, Inc. agreed to pay $5 million in damages, and deduct it as necessity business expense. However, the IRS states that MegaCorp, Inc. must characterize the hire as capital expenditure. That is why MegaCorp, Inc. has come for help to determine if they are empower to the deduction.
ISSUECan companies deduct salarys as business expense if they incurred the liability through the purchase of another comp some(prenominal)?
expiryMegaCorp, Inc. must capitalize the $5 million payment for the infringement liability as capital expenditure.

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ANALYSISAccording to class 162, a deduction is allowed on all ordinary and necessary expenses paid or incurred during the taxable twelvemonth in carrying in on any trade or business. Unfortunately for MegaCorp, Inc., the payment of a liability owned by a company that they acquired does not qualify as necessary business expense. part 263 states that any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, is not allowed any deduction. Since MegaCorp, Inc. had purchased Little, Inc. and obtained all their assets, the payment for the infringement liability must be capitalized in the year that it is incurred.If you want to get a full essay, order it on our website: Orderessay



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