CHAPTER 6
SELF-EMPLOYED BUSINESS INCOME
SCHEDULE C

Discussion Questions

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

Answer: A trade or business is any activity that is engaged in for profit continually and regularly. The income from a sole proprietor is netted with related ordinary and necessary business expenses to determine the effect on AGI.

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

Answer: According §162, in order for an expense to be deductible it must be an ordinary and necessary expenditure. The expense must also be reasonable (as established by the courts). A trade or business expense must not only be ordinary and necessary but also reasonable in amount and reasonable in relation to its purpose. The Supreme Court (in Welch, T., 1933, S Ct, 290 US 111) held that in order for an expense to be ordinary, in must be customary or usual in the taxpayers particular business. The necessary criterion refers to an expense that is appropriate and helpful, and 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.

3. What form is depreciation reported on and how does it relate to other forms such as Schedule C, E, F, and Form 2106?

Answer: Depreciation is reported on Form 4562, and the expenses flow from that forms to other schedules in the tax return. Depreciation is the expense allowed for the wear or loss of usefulness of a business asset. The understanding of depreciation is extremely