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INCOME FROM BUSINESS RULES

INCOME FROM BUSINESS RULES - 1 DRAFT INCOME FROM BUSINESS...

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DRAFT INCOME FROM BUSINESS: INCOME RULES ©F. BARRY GORMAN, PHD, CA, TEP INTRODUCTION PART I —BUSINESS OR PROPERTY INCOME 1. Distinction Between Business and Property Income (a) Overview (b) Nature of the Services Provided (c) Form of Organization (d) Degree of Commerciality (e) Other Factors 2. Significance of Distinction Between Business and Property Income PART II – BUSINESS INCOME CONCEPTS 1. Adventure or Concern in the Nature of Trade 2. Reasonable Expectation of Profit 3. Same or Similar Business PART III — INCOME FROM A BUSINESS OR PROPERTY 1. General Rule 2. How Do We Define “Profit”? 3. Specific Rules (a) Cash Advances (b) Receivables (c) Reserves (d) Insurance Proceeds (e) Bad Debt Recoveries (f) Income From Partnership, Trust, or Estate (g) Employee Compensation Plans (h) Inducements and Government Assistance (i) Foreign Tax Deduction PART IV — RULES APPLICABLE TO SPECIFIC BUSINESSES OR ACTIVITIES 1. Farmers 2. Partnerships (a) What is a Partnership? (b) Partnership Income (c) Income from a Partnership (d) Information Returns (e) Specific Revenues, Expenditures, and Losses 3. Work-In-Progress of Professional Business 4. Illegal Activities 5. Betting and Gambling Activities 6. Barter Transactions 1
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7. Damages, Settlements, and Similar Amounts PART V — RELATED MATTERS 1. Taxation Year (a) General Rule (b) Sole Proprietorships and Partnerships (c) Election for New Businesses 2. Expenses Prior to Incorporation 3. Commencement of Business Operations 4. Start-Up Expenses of Sole Proprietorship 5. Ceasing to Carry on Business (a) Accounts Receivable (b) Disposition of Business Assets After Termination of a Sole Proprietorship (c) Inventory (d) Interest Expense (e) Other Issues 2
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INTRODUCTION This note examines the rules related to the computation of income from a business. Although business and property income rules are contained together in the Act, students may wish to conceptually consider business and property to be separate sources of income. There are several essential questions that must be resolved with regard to the taxation of income from a business or property: What is a business? a property? What is income from a business? a property? What are the implications of the distinction between income from a business and income from property? and What is the distinction between income from a business and income on capital account? 1 Two questions related to business income are: When does a business commence? and When does a business terminate? All businesses use the same general rules to compute income for tax purposes, regardless of size, nature of the business, type of organizational format (that is, sole proprietorship, partnership, or limited company), or whether the activities are regular and ongoing or irregular. For example, a student operating a summer painting business as a sole proprietor essentially computes business income in a manner similar to a large national or international company headquartered in Canada, albeit with somewhat smaller revenue and expense amounts.
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