Monday, October 31, 2011

How to Calculate Depreciation

How To Calculate Depreciation | Law School Federal Income Taxation 

Depreciation expense is calculated utilizing either a straight line depreciation method or an accelerated depreciation method. The straight line method calculates depreciation by spreading the cost evenly over the life of the fixed asset. Accelerated depreciation methods such as declining balance and sum of years digits calculate depreciation by expensing a large part of the cost at the beginning of the life of the fixed asset.
The required variables for calculating depreciation are the cost and the expected life of the fixed asset. Salvage value may also be considered. Examples of depreciation calculations for both straight line and accelerated methods are provided below.

Straight Line Depreciation Method

The straight line depreciation method divides the cost by the life.

SL = Cost / Life

Example: A desk is purchased for $487.65. The expected life is 5 years. Calculate the annual depreciation as follows:
487.65 / 5 = 97.53
Each year for 5 years $97.53 would be expensed.



Declining Balance Depreciation Method

The declining balance depreciation method uses the depreciable basis of an asset multiplied by a factor based on the life of the asset. The depreciable basis of the asset is the book value of the fixed asset -- cost less accumulated depreciation.
The factor is the percentage of the asset that would be depreciated each year under straight line depreciation times the accelerator. For example, an asset with a four year life would have 25% of the cost depreciated each year. Using double declining balance or 200%, which is the most common, would mean that depreciation expense in the first year would be twice that or 50%. So to calculate the depreciation expense each year the depreciable basis would be multiplied by 50%.
Example: A copy machine is purchased for $3,217.89. The expected life is 4 years. Using double declining balance the depreciation would be calculated as follows:
factor = 2 * (1/4) = 0.50

YearDepreciable
Basis
Depreciation
Calculation
Depreciation
Expense
Accumulated
Depreciation
13,217.893,217.89 * 0.51,608.951,608.94
21,608.941,608.94 * 0.5804.472,413.41
3804.48804.48 * 0.5402.242,815.65
4402.24402.24 * 0.5201.123,016.77

Sum of the Years Digits

The first step is to sum the digits or numbers starting with the life and going back to one. For example, an asset with a life of 5 would have a sum of digits as follows: 5+ 4+ 3 +2 + 1 = 15
To find the percentage for each year divide the year's digit by the sum. In the example above the percentage would be calculated as follows:

Year 15 / 15 = 33.34%
Year 24 / 15 = 26.67%
Year 33 / 15 = 20 %
Year 42 / 15 = 13.33 %
Year 51/ 15 = 6.67%
Example: A conference table is purchase for 1,467.89. The expected life is 5 years. Since this is a 5 year asset the yearly factors have been calculated above.
YearDepreciation
Calculation
Depreciation
Expense
11,467.89 * 33.34 %489.40
21,467.89 * 26.67 %391.49
31,467.89 * 20 %293.58
41,467.89 * 13.33 %195.67
51,467.89 * 6.67 %97.91

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Since law school, I have traveled to dozens of countries for pleasure with my family.  It's not rocket science.  You just need to know how to start some side hustles.  Another one of my favorite ways to make money is buying and selling stocks and cryptocurrency on Robinhood.  Join now and get a free stock through this link:  Join Robinhood and Get a Free Stock!

Wednesday, October 26, 2011

INDOPCO, Inc. v. Commissioner case brief

Acquisition of Intangible Assets or Benefits
INDOPCO, Inc. v. Commissioner

FACTS
P was target of takeover by Unilever and incurred significant investment banking and legal fees and other expenses which it sought to deduct as ordinary and necessary business expenses.  

ISSUE
Are certain professional expenses incurred by a target corp. in the course of a friendly takeover deductible by that corp. as ‘ordinary and necessary’ business expenses under §162(a)?

RULES
-§162(a) allows the deduction of all the “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.
-§263 allows no deduction for a capital expenditure-an amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.  
-capital expenditure amortized and depreciated over the life of the asset, or where no specific asset or useful life can be ascertained, deduced upon dissolution of the enterprise.

APPLICATION
-Lincoln Savings was said to require a separate and distinct asset as a prerequisite for capitalization.  
Court holds that creation of a separate and distinct asset may be a sufficient but not necessary condition to classification as a capital expenditure.  
-A taxpayer’s realization of benefits beyond the year in which the expenditure is incurred is important in determining whether the appropriate tax treatment is immediate deduction or capitalization.
-The transaction produced significant benefits to National Starch that extended beyond the tax year in question.

HOLDING
-Expenses incurred for the purpose of changing the corporate structure for the benefit of future operations are not ordinary and necessary business expenses.

-The cost of acquiring stock, financial instruments, leases, and most intellectual property rights must be capitalized, as well as ‘intangibles’ such as amounts paid to obtain or modify contract rights or amounts paid to defend or perfect title.

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Since law school, I have traveled to dozens of countries for pleasure with my family.  It's not rocket science.  You just need to know how to start some side hustles.  Another one of my favorite ways to make money is buying and selling stocks and cryptocurrency on Robinhood.  Join now and get a free stock through this link:  Join Robinhood and Get a Free Stock!

Woodward v. Commissioner case brief

Woodward v. Commissioner
Subject:  Tax treatment of expenses incurred in appraisal litigation.

FACTS
Taxpayers owned/controlled majority of common stock in publishing corporation.  They voted their controlling shares of the stock of the corporation in favor of perpetual extension of the charter.  Minority voted against.  Taxpayers attempted to negotiate purchase of the dissenting stockholder’s shares, agreement could not be reached on the shares real value.  Taxpayers then brought an action in state court to appraise the value of the minority stock interest.  Court fixed the value, taxpayers purchased shares from the minority at that value.  
Taxpayers paid attorney’s, accountants’ and appraisers >$25,000 for services in litigation.  On their income tax return, they claimed deductions for the expenses, stating: “ordinary and necessary expenses paid for the management, conservation, and maintenance of property held for the production of income” deductible under §212.  

ARGUMENT
Taxpayers argue that the costs in question were property deducted b/c the legal proceedings did not directly involve the question of title to the minority stock, but was instead concerned solely with the value of the stock.  (court rejects argument, states: the origin of the claim was in the process of the acquisition of the stock itself.)

RULES
1.  Ask whether the origin of the claim that is litigated is in the process of the acquisition itself.
2.  Costs incurred in the acquisition or disposition of a capital asset are to be treated as capital expenditures.
3.  If an expense is capital, it cannot be deducted as ordinary and necessary, either as a business expense under §162 or as an expense of management, conservation or maintenance under §212.

APPLICATION
Court rejects a test that looks to the consequences of the litigation, and does not consider taxpayer’s motives or purposes in undertaking litigation, but examines the origin and character of the claim.  
-Litigation was required to fix the price.
-The expenses incurred in that litigation were property treated as part of the cost of the stock which taxpayers acquired.

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Since law school, I have traveled to dozens of countries for pleasure with my family.  It's not rocket science.  You just need to know how to start some side hustles.  Another one of my favorite ways to make money is buying and selling stocks and cryptocurrency on Robinhood.  Join now and get a free stock through this link:  Join Robinhood and Get a Free Stock!

Capitalization and Cost Recovery Outline, Federal Income Tax



I.  INTRODUCTION TO CAPITALIZATION AND COST RECOVERY.
1.  Capital Expenditures [§263]
a.  §263, §263(a): purely business expense not deductible if capital expenditure (no limitations on personal deductions).
1.  Capital expenditure: asset with a useful life well beyond a taxable year.
b.  Methods to give credit:
1) Current (deduction).
2) Depreciation (some each year).
3) Disposition (gain/loss at sale).
c. Relationship: at a constant rate of tax, allowing a current deduction (expensing an investment) is the equivalent of exempting the income from that investment from tax..
1) Allowing a deduction is appropriate under a consumption tax, but inappropriate under an income tax.  
d. What costs have to be capitalized?
1) Stock, bonds, plant.
i) §263(A): Direct costs must be capitalized (e.g. bricks and mortar, employees who only build the new plant).
ii) §263(A): Indirect costs should also be capitalized (e.g. things that would be passed along, including construction equipment).
2) Advertising?
i) Advertising has short-term and long-term benefits; increased sales and improved goodwill.
ii) Service has historically taken the position that normal advertising is deductible.
a) In some cases (e.g. advertising to raise support for zoning variance), capitalized.
e.  Woodward v. Commissioner; costs incurred in acquisition or disposition of capital asset (appraisal litigation) treated as capital expenditures.
f.  INDOPCO, Inc. v. Commissioner; I-banking and legal fees from friendly takeover capitalized under §263 b/c creates or enhances a “separate and distinct” asset.
g.  PNC Bancorp, Inc. v. Commissioner; costs for marketing, research, and originating loans deductible as “ordinary and necessary business expenses under §162(a).
1) Things down repeatedly are deductible; one-time expenses (e.g., closing on real estate) not.
2.  Depreciation: Accelerated Cost Recovery System [§168].
a.  Everything is divided into tangible (§168(a)) and intangible (167(a)) (e.g., goodwill).
b.  Depreciation of tangibles and real estate; §168(a): its method, period, & convention that matter.
1) §168(b)(1)(a) [depreciation method] = 200% DDB switching to straight-line.
a.  §168(b)(3): if residential, method = straight line.
2) §168(c) [recovery period] = 5 years on a 5y property.
3) §168(d) [convention] = 1/2 year.
a.  §168(d)(2): if residential, convention = mid-month.
4) §168(e)(1): table on how to treat property.
5) §168(k): meant to stimulate investment post-9/11.
a.  (k)(1)(a): depreciation deduction includes 30% of adjusted basis of the qualified property.
b.  (k)(1)(b): you still get the regular §168 deduction after the 30%.
c.  (k)(2): qualified property if it’s ‘tangible personal property’ with 20Y or less.
d.  (k)(4): 50% bonus depreciation for certain property.
c.  §179: taxpayers allowed to expense a portion of the purchase price for tangible property or certain computer software.
1) Note: §1245 property is only personal property - not real estate at all.
d. §280F: limit on depreciation for luxury automobiles.
1) §280F(d)(5): trying to separate cars from light trucks - 6,000 lb. limit for “luxury car”.
a) Toyota would qualify as a car, but Hummer is deductible.

§263 specifically disallows deduction of a capital expenditure.
Capital expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year. CAPEX is used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In the case when a capital expenditure constitutes a major financial decision for a company, the expenditure must be formalized at an annual shareholders meeting or a special meeting of the Board of Directors. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value of an asset adjusted for tax purposes). CAPEX is commonly found on the cash flow statement under "Investment in Plant Property and Equipment" or something similar in the Investing subsection.
For tax purposes, CAPEX is a cost which cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question. Further to the above, CAPEX creates or adds basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the US, Internal Revenue Code §§263 and 263A deal extensively with capitalization requirements and exceptions.
Included in capital expenditures are amounts spent on:
  1. acquiring fixed, and in some cases, intangible assets
  2. repairing an existing asset so as to improve its useful life
  3. upgrading an existing asset if its results in a superior fixture
  4. preparing an asset to be used in business
  5. restoring property or adapting it to a new or different use
  6. starting or acquiring a new business

An ongoing question for the accounting of any company is whether certain expenses should be capitalized or expensed. Costs which are expensed in a particular month simply appear on the financial statement as a cost incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset.


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Since law school, I have traveled to dozens of countries for pleasure with my family.  It's not rocket science.  You just need to know how to start some side hustles.  Another one of my favorite ways to make money is buying and selling stocks and cryptocurrency on Robinhood.  Join now and get a free stock through this link:  Join Robinhood and Get a Free Stock!

Hints to improve law school performance

In my first semester of law school I was in the top 5% of my class.  I had fallen in the second semester, still landing a very respectable and high position.  However, I asked myself: why did my grades go down during the second semester?  Here are some of the answers I came up with, and applying them has helped me greatly in doing well in law school as a transfer student.  (I imagine part of the reason my grades did slip was because I was preoccupied with transferring, which in itself is hard work.)

Also, if you are looking to transfer law schools or are in law school now, you would do well to follow some of this advice.

1.  Create a study schedule and try to stick with it.

2.  Live close to your school or if you can not, find the quickest and easiest commute.  Can you take the bus?  If so, are you able to study on the bus?  If the answer is a yes, you may want to consider it over driving.

3.  Do not allow yourself to get stressed.  Don't spend more than you have to, live below your means, save money for emergencies.  If you are living on student loans, try to set aside 10% for an emergency and save as much as you can for the summer time in case you have trouble finding work.  Financial stress is one of the most common causes on law school stress.

4.  Become excited about learning the law, and about studying.  Make note cards, become creative, enjoy making outlines, tell yourself everyday that you are becoming more intelligent, learning to reason better, write better, and think better.  Take the time to learn new words and use them.  Be proud of every accomplishment you make.  It is hard, and you may sometimes hate it, but always remind yourself that you are bettering yourself with each day.

5.  Do not get behind!  It is important to stay on top of your classes.  However, you may find yourself getting behind.  If so, I am planning on creating a guide in the future to help those who are behind in their classes.

6.  Don't save the studying for the end of the semester.  You will have a huge advantage over your peers if you study early and regularly.  Many people don't go to the library or read the cases more than once until the end, when they go back and try to learn everything quickly.  If you take just this piece of advice, you will probably already be ahead of 50% of your class.

7.  Don't worry about study groups, they are not important for everyone.  Some people like them, some hate them.  Don't stress if you can't get in one for some reason, whether it be you're too shy, or you are too busy.  You'll get good grades regardless, as long as you put in the effort.

8.  Ignore the naysayers and scamblogs.  They will only make you feel awful.  Try to think as positive as you can, but do remind yourself that it is tough out there, but only to motivate yourself.

9.  Don't surf the internet in class and if possible get rid of distractions such as Facebook (see http://www.facebookdetox.com) during your first semester.  This helped me a lot, as I found myself paying attention.  If you get bored in class for some reason, rewrite your notes, study on the topic the teacher is speaking about, or research further on topic.

10.  Don't be afraid to be called on.  Most likely it won't affect your grade one bit if you are not prepared.  Don't feel that you have to perform for the class.  It has no bearing on anything other than looking good.

11.  Cut back on working if you do work, or don't work if possible.  For many this is not an option, but ask yourself if you need the extra money from work, or if you want to further your law school investment by giving up some of the money you could make.  The ABA rule is do not work more than 20 hours a week.   However, I would say anything beyond 10 is undesirable. 

Also, if you are planning to transfer, try to not obsess over it.  In my second semester I spent a lot of time thinking about how I was going to get letters of recommendation,write a personal statement, and move to another state.  While these things are important, you should still keep your studies as priority number 1.

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While in law school I traveled the world.  Puerto Rico.  Egypt.  Israel.  The Netherlands.  All over the United States.  Costa Rica.  Panama... How, you ask?  I found ways to make money on the side.  One of those ways was hosting my apartment on AirBnB.  If you have an extra room, this is a perfect way to make some extra cash.

Since law school, I have traveled to dozens of countries for pleasure with my family.  It's not rocket science.  You just need to know how to start some side hustles.  Another one of my favorite ways to make money is buying and selling stocks and cryptocurrency on Robinhood.  Join now and get a free stock through this link:  Join Robinhood and Get a Free Stock!

Old Chief v. United States case brief (130 S. Ct. 563)

Old Chief v. United States 130 S. Ct. 563

FACTS
The defendant, a felon, was arrested after an incident involving the firing of a gun. The defendant was charged with various crimes including violating 18 U.S.C. Section: 922(g)(1) making it a crime for anyone “who has been convicted in any court of, a crime punishable by imprisonment for a term exceeding one year” to “possess in or affecting commerce, any firearm.    

RULES
“In this case, as in any other in which the prior conviction is for an offense likely to support conviction on some improper ground, the only reasonable conclusion was that the risk of unfair prejudice did substantially outweigh the discounted probative value of the record of conviction, and it was an abuse of discretion to admit the record when an admission was available.”   

APPLICATION
-Prior conviction was an element of the charge.  The prosecutor has to prove that OC was convicted for assault causing serious injury.
-Defense attorney offered to stipulate to the prior conviction; prosecutor rejected the offer.  
a.  He wanted the jury to hear about the prior crime, which would mean a greater chance of conviction.
-Defense argues: type of felony is irrelevant to the case at hand, so should not be admissible.  

HOLDING
Rejected OC’s argument.
a.  A trial is not a serious of stipulations - the jury expects to have some meat.
b.  Party autonomy.  The parties should not be denied their chosen method of proving their case just because the other side will stipulate to things that they cannot avoid.  
i.  Autonomy concern is involved in having an adversarial system in the first place.
c.  There is a need for narrative richness.  
i.  Party cannot be confined to proving their case only in a logical way, but also an emotional way.
ii.  If you force a litigant to accept a stipulation in lieu of what the jury expects from the evidence, the jury may wonder what’s being held back.
Second Issue in the case, dealing with prejudicial aspect of prior crime evidence:
Holding: Evidence of a prior felony should have been excluded because the danger of prejudice was substantial (bad character reasoning).
i.  FRE 404(b) - prior criminal acts.
ii.  Defendant’s offer to stipulate to the crime didn’t negate the relevance of the evidence, however it made it so the trial judge abused his discretion in not excluding the prejudicial evidence.  
-Defendant’s prior crime is not a part of the narrative the prosecutor is allowed to tell in trying the defendant for the current crime.  Concern for narrative richness is outweighed. 

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While in law school I traveled the world.  Puerto Rico.  Egypt.  Israel.  The Netherlands.  All over the United States.  Costa Rica.  Panama... How, you ask?  I found ways to make money on the side.  One of those ways was hosting my apartment on AirBnB.  If you have an extra room, this is a perfect way to make some extra cash.


Since law school, I have traveled to dozens of countries for pleasure with my family.  It's not rocket science.  You just need to know how to start some side hustles.  Another one of my favorite ways to make money is buying and selling stocks and cryptocurrency on Robinhood.  Join now and get a free stock through this link:  Join Robinhood and Get a Free Stock!

The Ins and Outs of Class Action Lawsuits: A Comprehensive Guide

Sometimes, you may buy a product only to find it defective. To make it worse, your search for the product reveals mass complaints. You can ...