Seminar 101 - Starting a Business and Keeping Records

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 You will need IRS Publication 583, and "California Business Portal", "Avoiding Problems" and "Keeping Records" to complete this topic.

Please answer the following as accurately as possible.

1. An unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. This business has no existence apart from the owner, and its personal liabilities are  the owners personal liabilities.

a. Sole proprietorship.
b. Partnership.
c. Corporation.
d. Limited Liability Company.

2. The relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. Must file annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax.

a. Sole proprietorship.
b. Partnership.
c. Corporation.
d. Limited Liability Company.

3. Prospective shareholders exchange money, property, or both, for the capital stock. It generally takes the same deductions as a sole proprietorship to figure its taxable its taxable income and it can also take special deductions. The profit is taxed when earned, and then is taxed to the shareholders when distributed as dividends.

a. Sole proprietorship.
b. Partnership.
c. Corporation.
d. Limited Liability Company.

4. Shareholders include their share of separately stated items of income, deductions, loss, and credit, and their share of non-separately stated income or loss. One can avoid double taxation by electing to be treated as

a. Sole proprietorship.
b. Corporation.
c. S Corporation.
d. Limited Liability Company.

5. None of the members are personally liable for its debts. It may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner. An entity formed under state law by filing articles of organization as

a. Limited Liability Company.
b. S Corporation.
c. Sole Proprietorship.
d. Partnership.

6. You must have a taxpayer identification number so the IRS can process your returns. The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). If you don't already have an EIN, you need to get one if you

a. Have employees or have a qualified retirement plan.
b. Operate your business as a corporation or partnership.
c. File returns for employment taxes or excise taxes.
d. Any of the above.

7. If the payee does not provide you with an identification number, you

a. Should not pay the payee.
b. May have to withhold part of the payments as backup withholding.
c. Should withhold the entire payment as backup withholding.
d. Should fire the payee as this is an indication the payee is not authorized to work in the United States.

8. You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. A tax year is usually 12 consecutive months. The following is a tax year.

a. Calendar tax year.
b. Fiscal tax year.
c. A cash year.
d. Both A and B above.

9. You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. You must use a calendar tax year if

a. You keep no books and/or have no annual accounting period.
b. Your present tax year does not qualify as a fiscal year.
c. You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.
d. Any of the above.

10.  You adopt a tax year by filing an application for an extension of time to file an income tax return, application for an employer identification number or paid estimated taxes for that tax year.

True False

11. A set of rules used to determine when and how income and expenses are reported and it is chosen when you file your first income tax return.

a. A fiscal tax year.
b. An accounting method.
c. A calendar tax year.
d. All of the above.

12. Under this method, you report income in the year you receive it and you usually deduct or capitalize expenses in the tax year you pay them.

a. The accrual method.
b. The cash method.
c. The calendar method.
d. The fiscal method.

13. Under this method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year.

a. The accrual method.
b. The cash method.
c. The calendar method.
d. The fiscal method.

14. You must use the same accounting method to figure your taxable income and to keep your books. An accounting method clearly shows income only if it treats all items of gross income and expenses the same from year to year.

True False

15. All businesses must file an annual income tax return, except a

a. Sole proprietorship.
b. Partnership.
c. Corporation.
d. None of the above.

16. The form of business you operate determines what taxes you must pay and how you must pay them. Generally, the kinds of business taxes are

a. Income tax and excise taxes.
b. Self-employment taxes.
c. Employment taxes.
d. All of the above.

17. A social security and Medicare tax is primarily for individuals who work for themselves. You payments contribute to your coverage under the social security system which provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

a. Income taxes.
b. Self-employment tax.
c. Gift taxes.
d. Any of the above.

18. If you make or receive payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. The following is an information return

a. Partnership.
b. Form 1099-Miss and Form W-2.
c. Form 8300.
d. All of the above.

19. Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. These costs are treated as

a. Start-up expenses
b. Ordinary expenses.
c. Capital expenses.
d. Necessary expenses.

20. Everyone in business must keep records. Good records will help you

a. Monitor the progress of your business.
b. Prepare your financial statements and tax returns.
c. Keep track of deductible expenses and identify source of receipts.
d. All of the above.

21. You need good records to prepare accurate financial statements. These included income (profit and loss) statements and balance sheets.

True False

22. Excepts in a few cases, the law does not require any specific kind records. You can choose any recordkeeping system suited to your business

a. That clearly shows your income and expenses for the year.
b. That includes a summary of your business transactions.
c. That show your gross income, as well as your deductions and credits.
d. All of the above.

23. It is important to keep these documents because they support the entries in your books and on your tax return. Gross receipts are the income your receive from your business. Documents that show gross receipts include

a. Cash register tapes and bank deposit slips.
b. Receipt books and invoices.
c. Credit card charge slips and Forms 1099-MISC.
d. All of the above.

24. Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Documents for purchases include

a. Cancelled checks.
b. Cash register tape receipts.
c. Credit card sales slips and invoices.
d. Any of the above.

25. Expenses are the costs you incur (other than purchases) to carry on your business. You supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include

a. Canceled checks and cash register tapes.
b. Account statements and credit card sales slips.
c. Invoices and petty cash slips for small cash payments.
d. Any of the above.

26. A book where you record each business transaction shown on your supporting documents and you may have to keep separate books for transactions that occur frequently.

a. A ledger.
b. A journal.
c. A checkbook.
d. All of the above.

27. A book that contains the totals from all your journal. It is organized into different accounts.

a. A checkbook.
b. A journal.
c. A ledger.
d. An employee compensation record.

28. You should keep your business account separate from your personal account. One of the first things you should do when you start a business is open a business checking account. The business checkbook

a. Is your basic source of information for recording your business transactions.
b. Should be checked for errors by reconciling it.
c. Should be used to deposit all daily receipts and make all payments by check to document business expenses.  
d. All of the above. 

29. By reconciling your checking account, you will

a. Verify how much money you have in the account.
b. Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account.
c. Correct any errors in your bank statement, checkbook and books.
d. All of the above.

30. You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. The period of limitations if you owe additional tax is

a. 3 years.
b. 6 years.
c. 7 years.
d. Not limited.

31. When starting a new business, there are many important decisions to make and many rules and procedures that must be addressed. It is helpful to begin with a business plan. A business plan is a blueprint of every aspect of your business and includes

a. Sales.
b. Marketing and location.
c. Advertising and promotion.
d. All of the above.

32. An accounting method is a set of rules to determine when and how income and expenses are reported. You should choose an accounting method for your business that will most accurately match your income and associated expenses. This is referred to as

a. The "Cash method".
b. The "Accrual method".
c. The "Matching principle".
d. The "Special method".

33.  If FTB examines your tax return, they may ask you to show

a. The method of accounting used to report your income and expenses.
b. That it accurately reflects your income.
c. That it is used consistently. 
d. All of the above.

34. The Franchise Tax Board encourages self-compliance by administering the California income tax laws and regulations in a timely, responsible, and fair manner.

True False

35. In the operation of your business, you will come across many types of records related to your income and expense transactions. Records to maintain includes

a. For gains and losses reported on Schedule D such as sale of real estate or securities, you will need documents to verify the sales prices, the cost of the asset you sold plus improvements if any.
b. For general expenses, you must be able to document the type of expense, the date and amount of payment, copies of cancelled checks, and that it was incurred in the operation of your trade or business.
c. For revenue/income items, you should keep copies of 1099's, sales invoices, sales agreements or contracts, etc.
d. All of the above.

36.  The Franchise Tax Board (FTB) may request information regarding your California Income return within the California statute of limitations period, which is

a. The later of 3 years from the due date of the return or the date the return was filed.
b. The later of 4 years of the due date of the return or the date the return was filed.
c. 8 years after a taxpayer files a return.
d. None of the above.

37. In transactions relating to abusive tax avoidance transactions, FTB has 12 years after a taxpayer files a return to mail a proposed deficiency assessment.

True False

38. Good records will help you to

a. Determine whether you are making or losing money and why.
b. Identify and categorize sources of revenue.
c. Document your expenses and transactions in case of an audit .
d. Any of the above.

39. The responsibility to prove entries, deductions, and statements made on your tax returns is known as

a. Statute of limitations.
b. Accounting methods.
c. The burden of proof.
d. None of the above.

40. Business transactions are ordinarily summarized in journals and ledgers.

True False