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?
1. c. The standard mileage rate was raised to 31 cents per mile for 1996 (for 1995, it was 30 cents).
2. d. The Social Security wage base is now $62,700. Inflation causes it to increase each year. However, you must pay Medicare taxes on everything you make.
3. c. Quarterly tax payments are due on April 15, June 15, September 15 and January 15 the following year.
4. b and c. Both Keogh plans and SEPs are tax-advantaged pension plans for small-business owners.
5. b. In 1995, the deduction for self-employed people's health insurance was increased to 30 percent.
6. b. Currently, the highest official tax rate for individuals is 39.6 percent, although the phaseout of personal exemptions and deductions can cause your actual effective rate to be even higher.
7. d. The highest corporate income tax rate is 39 percent.
8. a, b and d. Only corporations are taxed at the business level and are allowed to accumulate some profits without passing them on to be taxed at the shareholders' individual tax rates.
9. a. The IRS likes written evidence, created at the time the expense was incurred, and receipts and canceled checks are the best.
10. d. Working lunches where all the diners work for the same company aren't deductible.
11. d. The heating unit must be depreciated over a number of years, and the deduction for the car will be limited by the luxury auto limit to approximately $3,060.
12. a and c. Day-care operators, and retailers or wholesalers who store inventory at home and whose only fixed place of business is their home, are granted exceptions from the exclusive use test.
13. a and b. Although the IRS allows you to use any reasonable technique, methods a and b are the ones suggested in IRS publications.
14. True. Businesses with inventories are not allowed to use the cash basis of accounting.
15. a. The noncompete covenant cannot be written off as worthless: The fact that Wool is unable to compete with Bushe's business is irrelevant.
16. a. If business services are paid for in property, the fair market value must be included in the recipient's income.
17. False. Unless a taxpayer uses the accrual method, compensation generally must be reported as income in the year received, regardless of when the services giving rise to the commissions were performed.
18. b. An S corporation election can be revoked by a vote of shareholders who own more than 50 percent of the outstanding corporate shares.
19. True. As a practical matter, this means cash-basis taxpayers typically cannot take such a deduction since money is normally not included in income until it is received.
20. c. The basis of the new truck is the sum of the adjusted basis of the old equipment ($4,600) and the amount of cash paid ($4,000).
- 0 to 7 right: You need help with the basics, according to Lauletta and Jacksack. "Consider taking one of the tax training courses the IRS offers," says Jacksack. (Call your local IRS office, and ask for information about a course near you.) The pair also suggests following up the course with one or more tax-planning sessions with your accountant for specific advice about your company.
- 8 to 14 right: "You're on the right track," says Lauletta, "but you may need more information to operate your business as tax-effectively as possible." His suggestion: Read at least one book on taxes for small-business owners, and keep up to speed by subscribing to business periodicals or visiting tax-related Web sites.
- 15 to 18 right: "Anyone in this range knows quite a bit about business taxes," says Jacksack, "but could still benefit from periodic updates on annual changes."
- 19 to 20 right: "Outstanding!" Lauletta and Jacksack say. Have you considered becoming an accountant?
CCH Inc., (847) 267-2484, email@example.com.