Pop Quiz Test your tax IQ.

If you're not an expert at spotting tax-savingoppor-tunities, it may be time to give your business a taxcheck-up. Here's your chance to see how much you really knowabout keeping Uncle Sam's hand out of your pocket while stayingoff the IRS' audit list.

Take this quiz, prepared by Tom Lauletta and Susan Jacksack,attorneys and analysts for the CCH Business Owner's Toolkit, aRiverwoods, Illinois, provider of legal, tax and businessinformation, to see whether you're up to date on the ins andouts of income taxes for business. (Watch out--some questions havemore than one correct answer.) To find out how you rate, check outthe answers and score card at the bottom of the page.

1. When figuring your deductible costs for business use of acar, the 1996 standard business mileage rate for passengerautomobiles, 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 paySocial Security taxes on the first _________ they earn.

a. $42,100

b. $60,000

c. everything they make

d. $62,700

3. Most small-business owners must pay estimated taxes duringthe 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 unincorporatedsmall-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 healthinsurance 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 haveto 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 haveto pay is:

a. 15 percent

b. 25 percent

c. 34 percent

d. 39 percent

8. The profits of which of the following business entitieswill be taxed at the owners' individual income taxrates?

a. sole proprietorships

b. partnerships

c. corporations (other than S corporations)

d. limited liability companies

9. In an IRS audit, the best kind of evidence to prove yourbusiness 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 spendmost of your time discussing business, how much of the tab isdeductible?

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 theheating unit in your office, incorporated your business (withsignificant legal fees), and bought a new car. Which of theseexpenses 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 mustregularly and exclusively use a designated portion of your home forbusiness purposes. Exceptions to this exclusive business use ruleapply to:

a. areas used for a licensed day-care business

b. areas used within the first two years after a businessbegan

c. areas used to store business inventories

d. no areas: there are no exceptions to the home officeexclusive business use rule

13. To compute your home office deduction, how do youdetermine the percentage of the home used for business?

a. divide the area of the business portion (in square feet) bythe total area of the house (also in square feet)

b. divide the number of rooms used for business by the totalnumber of rooms in the house

c. divide the value of the area used for business by the valueof the whole house (less the value of the land it's situatedon)

d. divide the income generated by the home office areas by theamount of your total family income

14. All businesses having inventories must use the accrualmethod of reporting purchases and sales.

a. True

b. False

15. On January 1, 1996, Rose Bushe purchased VirginiaWool's floral shop for $100,000. Bushe also agreed to pay Wool$15,000 for signing a three-year noncom-pete covenant. Woolsuffered a debilitating stroke on January 1, 1997, and has been ina nursing home ever since. What part, if any, of the cost of theagreement not to compete can Bushe immediately deduct because Woolis no longer a threat to Bushe's floral shop business?

a. 0

b. $10,000

c. $15,000

d. $15,000, plus any court costs, professional fees and otherexpenses necessary to prove that Wool is permanently disabled

16. In 1995, Tom Teak, a carpenter, received a boat from theSunshine Marina in exchange for carpentry work done on a new dock.The fair market value of the boat is $2,000, although it cost themarina only $1,600. What amount, if any, is taxable income toTom?

a. $2,000

b. $1,600

c. $400

d. $0

17. Charlie, a cash-basis salesperson, received commissionsin February 1996 based on sales made in the last quarter of 1995.The commissions should be reported on his 1995 income taxreturn.

a. True

b. False

18. Fill in the blank: Status as an S corporation (acorporation whose shareholders report their allocable portions ofcorporate profits on their individual returns) may be revoked ifthe shareholders who collectively own more than ___ percent of theoutstanding shares in the
S corporation stock consent to its revocation.

a. 33¹/3

b. 50

c. 66²/3

d. The ownership percentage is not relevant; once S status iselected, it cannot be revoked by shareholders.

19. A cash-basis taxpayer may not claim a bad debt deductionunless the amount to be deducted has previously been included inincome. (T/F)

20. Joe Davis, a landscaper, traded in his old truck, whichhad an adjusted basis of $4,600, for a new one costing $10,000. Thedealer allowed $6,000 on the old truck, and Davis paid $4,000 incash as well. What is Davis' basis in the new truck?

a. $4,600

b. $6,000

c. $8,600

d. $10,000

Answers

1. c. The standard mileage rate was raised to 31 centsper 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 payMedicare taxes on everything you make.

3. c. Quarterly tax payments are due on April 15, June15, September 15 and January 15 the following year.

4. b and c. Both Keogh plans and SEPs are tax-advantagedpension plans for small-business owners.

5. b. In 1995, the deduction for self-employedpeople's health insurance was increased to 30 percent.

6. b. Currently, the highest official tax rate forindividuals is 39.6 percent, although the phaseout of personalexemptions and deductions can cause your actual effective rate tobe even higher.

7. d. The highest corporate income tax rate is 39percent.

8. a, b and d. Only corporations are taxed at thebusiness level and are allowed to accumulate some profits withoutpassing them on to be taxed at the shareholders' individual taxrates.

9. a. The IRS likes written evidence, created at the timethe expense was incurred, and receipts and canceled checks are thebest.

10. d. Working lunches where all the diners work for thesame company aren't deductible.

11. d. The heating unit must be depreciated over a numberof years, and the deduction for the car will be limited by theluxury auto limit to approximately $3,060.

12. a and c. Day-care operators, and retailers orwholesalers who store inventory at home and whose only fixed placeof business is their home, are granted exceptions from theexclusive use test.

13. a and b. Although the IRS allows you to use anyreasonable technique, methods a and b are the ones suggested in IRSpublications.

14. True. Businesses with inventories are not allowed touse the cash basis of accounting.

15. a. The noncompete covenant cannot be written off asworthless: The fact that Wool is unable to compete with Bushe'sbusiness is irrelevant.

16. a. If business services are paid for in property, thefair market value must be included in the recipient'sincome.

17. False. Unless a taxpayer uses the accrual method,compensation generally must be reported as income in the yearreceived, regardless of when the services giving rise to thecommissions were performed.

18. b. An S corporation election can be revoked by a voteof shareholders who own more than 50 percent of the outstandingcorporate shares.

19. True. As a practical matter, this means cash-basistaxpayers typically cannot take such a deduction since money isnormally not included in income until it is received.

20. c. The basis of the new truck is the sum of theadjusted basis of the old equipment ($4,600) and the amount of cashpaid ($4,000).

Scoring:

• 0 to 7 right: You need help with the basics, accordingto Lauletta and Jacksack. "Consider taking one of the taxtraining courses the IRS offers," says Jacksack. (Call yourlocal IRS office, and ask for information about a course near you.)The pair also suggests following up the course with one or moretax-planning sessions with your accountant for specific adviceabout your company.

• 8 to 14 right: "You're on the righttrack," says Lauletta, "but you may need more informationto operate your business as tax-effectively as possible." Hissuggestion: Read at least one book on taxes for small-businessowners, and keep up to speed by subscribing to business periodicalsor visiting tax-related Web sites.

• 15 to 18 right: "Anyone in this range knows quite abit about business taxes," says Jacksack, "but couldstill benefit from periodic updates on annual changes."

• 19 to 20 right: "Outstanding!" Lauletta andJacksack say. Have you considered becoming an accountant?

Contact Sources

CCH Inc., (847) 267-2484, sjacksac@cch.com.