Utah Contractor Practice Exam

On what basis are contractor's income taxes assessed?

1. Net profit

2. Gross profit

3. Profit/Loss statements

4. All of the above

The correct answer is: Net profit

The assessment of a contractor's income taxes is primarily based on net profit, which is the income remaining after all allowable expenses have been deducted from gross income. Net profit provides a clearer picture of the actual earnings of the business and is the figure that tax authorities use for taxation purposes. This approach ensures that contractors are taxed on their true economic benefit rather than on the total income generated, which can include costs that do not contribute to profitability. While gross profit and profit/loss statements provide valuable information regarding a contractor's financial performance, they do not directly determine tax liability. Gross profit reflects revenues minus the direct costs of goods sold, and profit/loss statements summarize revenues and expenses over a period but do not account for all deductible expenses that affect taxable income. Therefore, net profit is the most relevant figure for assessing income taxes.