Question

1. Discuss the definition of trade or business. Why does it matter whether a taxpayer is classified as an employee or as self-employed?

2. Discuss the concepts of ordinary, necessary, and reasonable in relation to trade or business expenses.  

3. Discuss the concept of electing § 179 expense. Does the election allow a larger expense deduction in the year of asset acquisition?

4. Why were the hobby loss rules established?

5. What factors determine whether an activity is a trade or business or a hobby?

6. How are the terms basis, adjusted basis, and fair market value defined as they apply to the calculation of gains and losses?

7. What is meant by the terms realized gain (loss) and recognized gain (loss) as they apply to the sale of assets by a taxpayer?

8. What are the different classifications of capital assets? List each classification and the rate at which the gains are taxed.

9. How is a net capital loss treated? Include in your answer a discussion of how a net capital loss is treated in relation to other income.

Answer 1

As per policy, only one question is allowed to answer at a time, so answering Q1 :

1) The terminology of Trade or Business is usually described as various functions performed and carried out to generate income either by producing or selling products or performing any services through the use of various assets or man power available with trading concern.

It matters if the taxpayer is classified as an employee or self-employed because in case of self-employed person the income of the concern is the income of the person and it is defined as revenues minus expenses and also the taxation of the self-employed and the concern is the same. The income of the concern is the income of the self-employed person.

However, for a employee, we have to calculate the salaries and other incomes of the employee and taxed as individuals under the heading of Salaries.