If you're not an expert at spotting tax-saving oppor-tunities, it may be time to give your business a tax check-up. Here's your chance to see how much you really know about keeping Uncle Sam's hand out of your pocket while staying off the IRS' audit list.
Take this quiz, prepared by Tom Lauletta and Susan Jacksack, attorneys and analysts for the CCH Business Owner's Toolkit, a Riverwoods, Illinois, provider of legal, tax and business information, to see whether you're up to date on the ins and outs of income taxes for business. (Watch out--some questions have more than one correct answer.) To find out how you rate, check out the answers and score card at the bottom of the page.
1. When figuring your deductible costs for business use of a car, the 1996 standard business mileage rate for passenger automobiles, vans, pickups or panel trucks is:
a. $1 per mile
b. $.25 per mile
c. $.31 per mile
d. $.10 per mile
2. Fill in the blank: In 1996, self-employed people pay Social Security taxes on the first _________ they earn.
c. everything they make
3. Most small-business owners must pay estimated taxes during the year. When is the first quarterly tax payment due?
a. April 1
b. January 31
c. April 15
d. March 15
4. The tax-advantaged pension plan for unincorporated small-business owners is called a:
a. 401(k) plan
b. Keogh plan
c. SEP plan
d. 403(b) plan
5. If you're self-employed, how much of your health insurance is a deductible business expense?
a. 25 percent
b. 30 percent
c. 50 percent
d. 100 percent
6. The highest federal income tax rate individuals may have to pay is:
a. 36 percent
b. 39.6 percent
c. 49.2 percent
d. 28 percent
7. The highest federal income tax rate a corporation may have to pay is:
a. 15 percent
b. 25 percent
c. 34 percent
d. 39 percent
8. The profits of which of the following business entities will be taxed at the owners' individual income tax rates?
a. sole proprietorships
c. corporations (other than S corporations)
d. limited liability companies
9. In an IRS audit, the best kind of evidence to prove your business expenses is:
a. receipts and canceled checks
b. computerized records
c. statements from your accountant
d. an eyewitness's testimony
10. If you take one of your employees out to lunch and spend most of your time discussing business, how much of the tab is deductible?
a. all of it
b. 50 percent of it
c. 50 percent of the employee's lunch only
d. none of it
11. During 1996, you purchased a new computer, replaced the heating unit in your office, incorporated your business (with significant legal fees), and bought a new car. Which of these expenses may be totally deductible in 1996?
a. computer, heating unit and legal fees
b. car and heating unit
c. the heating unit only
d. computer and legal fees
12. To qualify for a home office deduction, you must regularly and exclusively use a designated portion of your home for business purposes. Exceptions to this exclusive business use rule apply to:
a. areas used for a licensed day-care business
b. areas used within the first two years after a business began
c. areas used to store business inventories
d. no areas: there are no exceptions to the home office exclusive business use rule
13. To compute your home office deduction, how do you determine the percentage of the home used for business?
a. divide the area of the business portion (in square feet) by the total area of the house (also in square feet)
b. divide the number of rooms used for business by the total number of rooms in the house
c. divide the value of the area used for business by the value of the whole house (less the value of the land it's situated on)
d. divide the income generated by the home office areas by the amount of your total family income
14. All businesses having inventories must use the accrual method of reporting purchases and sales.
15. On January 1, 1996, Rose Bushe purchased Virginia Wool's floral shop for $100,000. Bushe also agreed to pay Wool $15,000 for signing a three-year noncom-pete covenant. Wool suffered a debilitating stroke on January 1, 1997, and has been in a nursing home ever since. What part, if any, of the cost of the agreement not to compete can Bushe immediately deduct because Wool is no longer a threat to Bushe's floral shop business?
d. $15,000, plus any court costs, professional fees and other expenses necessary to prove that Wool is permanently disabled
16. In 1995, Tom Teak, a carpenter, received a boat from the Sunshine Marina in exchange for carpentry work done on a new dock. The fair market value of the boat is $2,000, although it cost the marina only $1,600. What amount, if any, is taxable income to Tom?
17. Charlie, a cash-basis salesperson, received commissions in February 1996 based on sales made in the last quarter of 1995. The commissions should be reported on his 1995 income tax return.
18. Fill in the blank: Status as an S corporation (a
corporation whose shareholders report their allocable portions of
corporate profits on their individual returns) may be revoked if
the shareholders who collectively own more than ___ percent of the
outstanding shares in the
S corporation stock consent to its revocation.
d. The ownership percentage is not relevant; once S status is elected, it cannot be revoked by shareholders.
19. A cash-basis taxpayer may not claim a bad debt deduction unless the amount to be deducted has previously been included in income. (T/F)
20. Joe Davis, a landscaper, traded in his old truck, which had an adjusted basis of $4,600, for a new one costing $10,000. The dealer allowed $6,000 on the old truck, and Davis paid $4,000 in cash as well. What is Davis' basis in the new truck?