Question

PLEASE PROVIDE AN ANSWER FOR EACH...

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

Answer 1) trade or business is generally define as entity which includes any activity carried on for income from selling goods or performing services. The entity is seprate from its owner or promoter in term of tax.

There are different tax rule for an employee or as self-employed.

Self-employed are the person or a situation in which an individual works for himself /herself instead of working for an employer that pays a salary or a wage. Self employed people do not have taxes withheld from their income by employers, so they pay their own estimated income tax on the income earned,including of their Social Security and Medicare taxes. As per act of 2016, they must pay filltheir tax return if annual net profits of over $400.

Answer 2) As per §162, expense to be deductible should be divided in an ordinary and necessary expenditure. The expense should be reasonable. In the decision by the Supreme Court (in Welch, T., 1933, S Ct, 290 US 111) held in order for an expense to be ordinary, it must be customary or usual in the taxpayer's particular business. The expense that is appropriate and helpful but not necessarily essential to the taxpayer's business.Reasonableness is not specifically included by IRC §162, but has been added by the courts.In these cases, the courts held that a trade or business expense must not only be ordinary and necessary but also reasonable in amount and reasonable in relation to its purpose.

Answer 3) The taxpayer has right to claim some portion of personal property purchased during the year. The maximum yearly deduction is determined in §179(b)(1) and is $500,000 for 2013. The expense election is phased out dollar-for-dollar for purchases in excess of $2,500,000. Non used deduction under §179 will not be carried forward for next year unless the expense is disallowed by the lack of business income.

Answer 4) Hobby loss is define as any loss or expanses relates to an income/loss producing activity mainly carried on for recreation or personal enjoyment.

Answer 5) factors for the differntiation are :

• Manner the taxpayer carries the activity.
• Expertise of the taxpayer or his or her advisers.
• Time used by the taxpayer entity in carrying on the activity.

Answer 6)

• Term basis: the cost of the property bought in cash, debt obligations, or other property or services. Property can also be acquired other than through purchase such as by gift, inheritance, divorce, or other exchange.
• Adjusted basis : increases in cost to the property such as commission fees or additions incurred on stock transactions, or decreases such as depreciation on property and nontaxable stock dividends or splits.
• Fair market value: the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell . Sale or buy of similar type of property, at a time , are typically used in figuring fair market value.

Answer 7) The term "realized" of the taxpayer get in the transaction , sometimes called the proceeds from the sale. This includes cash received plus the FMV of any property or services also received in the transaction plus any debt. The term "recognized" is the total amount will be recorded on the tax return as a gain or loss. Sales of asset sold are considered depending on the type of transaction.

Answer 8)A capital asset are all assets that are not classified as other types of property. generally includes assets mainly used for investment or personal purposes. Example of a capital asset is stocks or bonds, the taxpayer's primary residence,.Capital assets do not include stock in trade or inventory, copyrights, accounts or notes receivables, and property subject to depreciation.The tax treatment of a capital gain or loss varies depending on several factors, including the holding period of the capital asset, whether the sale of the asset produced a gain or loss, the combination of capital gains and losses.

Answer 9)generally long-term capital losses should be netted with long-term capital gains. Short-term capital losses must be netted with short-term capital gains. Then the two figures must be netted together. Any remaining capital loss reduces ordinary income by a maximum of $3,000 per year for individual taxpayers. Any excess may be carried forward indefinitely to offset gains.

Answer 9)