FUNDAMENTALS OF TAXATION FOR
INDIVIDUALS AND BUSINESS ENTITIES A
PRACTICAL APPROACH 2025 EDITION
GREGORY A CARNES TEST BANK
PRACTICE SCRIPT UPDATED 2026 TESTED
SOLUTIONS
⫸ Hobbies Answer: Taxpayer does not exert sufficient effort to try to
earn a profit. Revenue from hobbies is taxable
⫸ Investment activity Answer: the acquisition of an asset with the
expectation that it will increase in value and/or produce an income
stream that does not require taxpayer effort
⫸ Facts and Circumstances Test Answer: The determination of an
activity is subjective and based on weighting key facts for each
circumstance
(ex: Owning rental real estate)
⫸ Personal Activity Answer: An activity that does not relate to a trade
or business or an investment (typically taxed as other income)
⫸ Ordinary assets Answer: Properties that are used in a taxpayer's trade
or business, or held primarily for sale to customers
, Common types are:
Inventory, accounts receivable, and notes receivable
Depreciable property and realty used in a trade or business that the
taxpayer has owned for one year or less
Copyrights and musical, artistic, and literary works, if held by the
taxpayer who created the work (though a composer can elect to have
their musical work treated as a capital asset instead)
⫸ Ordinary Income Tax Answer: Paid on salary and earnings from self-
employment as well as other things @MARGINAL tax rate (10-37%)
⫸ Ordinary losses Answer: Losses from regular business operations.
Can reduce ordinary income and capital gains, whereas capital losses
can reduce only capital gains and up to $3,000 ($1,500 for married filing
separately) of ordinary income.
⫸ Section 1231 assets Answer: depreciable or real property used in a
taxpayer's trade or business owned for more than one year.
⫸ Capital assets Answer: Any asset that is not an ordinary asset or a
Section 1231 asset.
INDIVIDUALS AND BUSINESS ENTITIES A
PRACTICAL APPROACH 2025 EDITION
GREGORY A CARNES TEST BANK
PRACTICE SCRIPT UPDATED 2026 TESTED
SOLUTIONS
⫸ Hobbies Answer: Taxpayer does not exert sufficient effort to try to
earn a profit. Revenue from hobbies is taxable
⫸ Investment activity Answer: the acquisition of an asset with the
expectation that it will increase in value and/or produce an income
stream that does not require taxpayer effort
⫸ Facts and Circumstances Test Answer: The determination of an
activity is subjective and based on weighting key facts for each
circumstance
(ex: Owning rental real estate)
⫸ Personal Activity Answer: An activity that does not relate to a trade
or business or an investment (typically taxed as other income)
⫸ Ordinary assets Answer: Properties that are used in a taxpayer's trade
or business, or held primarily for sale to customers
, Common types are:
Inventory, accounts receivable, and notes receivable
Depreciable property and realty used in a trade or business that the
taxpayer has owned for one year or less
Copyrights and musical, artistic, and literary works, if held by the
taxpayer who created the work (though a composer can elect to have
their musical work treated as a capital asset instead)
⫸ Ordinary Income Tax Answer: Paid on salary and earnings from self-
employment as well as other things @MARGINAL tax rate (10-37%)
⫸ Ordinary losses Answer: Losses from regular business operations.
Can reduce ordinary income and capital gains, whereas capital losses
can reduce only capital gains and up to $3,000 ($1,500 for married filing
separately) of ordinary income.
⫸ Section 1231 assets Answer: depreciable or real property used in a
taxpayer's trade or business owned for more than one year.
⫸ Capital assets Answer: Any asset that is not an ordinary asset or a
Section 1231 asset.
