As billions of IoT devices join the Internet, researchers and innovators increasingly explore IoT capabilities achieved via service composition or reuse of existing capabilities via service decomposition. Many systematic literature reviews (SLRs) were produced on this subject; however, two issues remain to be addressed: i) a reference taxonomy of the different aspects of IoT capabilities composition and decomposition is needed, and ii) many formal questions (e.g., standards role, formal representations applications, state-space explosion countermeasures, etc.), technical questions (e.g., composition process types and automation levels synergies, service decomposition categories, the role of AI/ML, etc.), and QoS questions (e.g., privacy, interoperability, and scalability challenges and solutions, etc.) remain unanswered. We introduce this work by discussing notions of IoT capabilities composition and decomposition in a layered IoT architecture while highlighting the strengths and weaknesses of existing SLRs. We identify unanswered questions through gaps in related work and motivate these questions using the PICOC methodology. We explain the search methodology and organize the topic questions using the proposed reference taxonomy. The identified research questions are answered, and trends and gaps that need additional attention from the research community are highlighted. This effort benefits city planners and end-users of IoT systems as it contributes to a better understanding of the role of composition and decomposition of IoT capabilities in building value-added services or reusing existing ones for resource optimization. For researchers, this effort contributes a reference taxonomy for the topic and sheds light on important questions while highlighting corresponding trends and gaps requiring further attention.