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Section 2 of 7

CSLB Budget and Planning Practice Questions

10 free practice questions on budget and planning, part of the Business Finances section (about 15% of the exam). Try each one, then open the answer: every choice is explained and the law is quoted.

Questions and answers

  1. Business Finances

    1. A painting contractor has fixed costs of $9,000 per month. The average job sells for $1,500 and has variable costs of $1,050. Using the SBA break-even formula, how many jobs per month are needed to break even?

    • A. 4 jobs
    • B. 6 jobs
    • C. 9 jobs
    • D. 20 jobs
    Show answer

    Correct answer: D

    • A. 4 jobs

      This adds the price and variable cost instead of subtracting them ($9,000 / $2,550 is about 3.5). The SBA formula divides fixed costs by price minus variable costs.

    • B. 6 jobs

      This divides the $9,000 in fixed costs by the $1,500 price alone. The SBA formula first subtracts the $1,050 variable cost from the price.

    • C. 9 jobs

      This divides the $9,000 in fixed costs by the $1,050 variable cost alone (about 8.6). The formula uses price minus variable costs, which is $450 per job.

    • D. 20 jobs

      Correct answer

      Each job leaves $1,500 - $1,050 = $450 to cover fixed costs, and $9,000 / $450 = 20 jobs, using the SBA formula Fixed Costs / (Price - Variable Costs).

    Explanation

    The SBA formula is: fixed costs divided by (price minus variable costs) equals the break-even point in units. Step 1: $1,500 - $1,050 = $450 left from each job to cover fixed costs. Step 2: $9,000 / $450 = 20 jobs. Choosing 6 divides by the price only ($9,000 / $1,500). Choosing 9 divides by the variable cost only ($9,000 / $1,050 is about 8.6). Choosing 4 adds price and variable cost instead of subtracting ($9,000 / $2,550 is about 3.5).

    Source

  2. Business Finances

    2. A contractor is a sole proprietor and has no tax withheld from any wages. According to IRS Publication 583, when does the contractor generally have to make estimated tax payments?

    • A. When expecting to owe $500 or more in tax
    • B. When expecting to owe $1,000 or more in tax
    • C. Only when the business has employees on payroll
    • D. Only after the IRS sends a written notice
    Show answer

    Correct answer: B

    • A. When expecting to owe $500 or more in tax

      $500 is the amount for corporations, not sole proprietors. A sole proprietor generally must pay estimated tax when expecting to owe $1,000 or more.

    • B. When expecting to owe $1,000 or more in tax

      Correct answer

      IRS Publication 583 says you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.

    • C. Only when the business has employees on payroll

      Having employees is not what triggers estimated tax. The trigger is expecting to owe $1,000 or more in tax when filing the return.

    • D. Only after the IRS sends a written notice

      An IRS notice is not what triggers estimated tax. The contractor generally must pay if expecting to owe $1,000 or more when filing the return.

    Explanation

    IRS Publication 583 says sole proprietors generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when they file their return. The $500 amount in the same publication is the rule for corporations, not sole proprietors. Having employees or getting an IRS notice is not what triggers estimated tax.

    Sources

  3. Business Finances

    3. A newly formed C corporation (not an S corporation) will do contracting work. It has never filed an income tax return. According to IRS Publication 583, which tax year can it adopt?

    • A. Only a calendar year that ends on December 31
    • B. Only a fiscal year that ends on June 30
    • C. Either a calendar year or a fiscal year
    • D. Any period the owners pick, even 18 months long
    Show answer

    Correct answer: C

    • A. Only a calendar year that ends on December 31

      A first-time filer is not limited to a calendar year. Publication 583 says it can adopt either a calendar tax year or a fiscal tax year.

    • B. Only a fiscal year that ends on June 30

      Publication 583 does not limit a first-time filer to a June 30 year end. It can adopt either a calendar tax year or a fiscal tax year.

    • C. Either a calendar year or a fiscal year

      Correct answer

      Publication 583 says a business that has never filed an income tax return can adopt either a calendar or a fiscal tax year. The note that some must use a particular year covers some partnerships and S corporations, and this is a C corporation.

    • D. Any period the owners pick, even 18 months long

      A tax year is usually 12 consecutive months, so an 18-month period is not allowed.

    Explanation

    IRS Publication 583 says that if you have never filed an income tax return for your business, you can adopt either a calendar tax year or a fiscal tax year. Some partnerships and S corporations must use a particular year, which is why the stem says this is a C corporation. A tax year is usually 12 consecutive months, so an 18-month year is not allowed.

    Sources

  4. Business Finances

    4. A growing contractor is thinking about funding from venture capital investors. According to the SBA, what does the owner usually give up in exchange for the money?

    • A. Some control and ownership of the company
    • B. A fixed monthly loan payment with interest
    • C. A personal guarantee backed by the owner's home
    • D. Nothing, because investors expect only a product reward
    Show answer

    Correct answer: A

    • A. Some control and ownership of the company

      Correct answer

      Correct. The SBA says venture capital is invested in return for equity, and the owner should be prepared to give up some control and ownership. Almost all venture capitalists want at least a seat on the board.

    • B. A fixed monthly loan payment with interest

      Monthly loan payments come with a loan. The SBA says venture capital is invested for equity rather than debt, so it is not a loan.

    • C. A personal guarantee backed by the owner's home

      Venture capital is not a loan; the SBA says it is invested in return for equity rather than debt. What the owner gives up is some control and ownership.

    • D. Nothing, because investors expect only a product reward

      A product reward instead of ownership describes crowdfunding. Venture capitalists invest in return for equity and usually want at least a board seat.

    Explanation

    The SBA says venture capital invests money in return for equity (ownership), not debt, so it is not a loan. Almost all venture capitalists want at least a seat on the board, so the owner should be ready to give up some control and ownership. Monthly loan payments come with a loan, not venture capital. A product reward instead of ownership describes crowdfunding.

    Sources

  5. Business Finances

    5. For 2026, a sole proprietor contractor who files as single expects to owe $60,000 in total tax. The full-year 2025 return showed total tax of $40,000, and 2025 AGI was $200,000. Under IRS Publication 505, what is the required annual payment for 2026?

    • A. $40,000
    • B. $44,000
    • C. $54,000
    • D. $60,000
    Show answer

    Correct answer: B

    • A. $40,000

      $40,000 uses 100% of the 2025 tax. Because 2025 AGI was more than $150,000, 110% replaces 100%, giving $44,000.

    • B. $44,000

      Correct answer

      Correct. The payment is the smaller of 90% x $60,000 = $54,000 or 110% x $40,000 = $44,000 (110% applies because 2025 AGI was over $150,000). The smaller amount is $44,000.

    • C. $54,000

      $54,000 is 90% of the expected 2026 tax, but it is the larger of the two amounts. The required annual payment is the smaller one, $44,000.

    • D. $60,000

      $60,000 is the full expected 2026 tax. The rule uses 90% of the expected tax or 110% of the 2025 tax, whichever is smaller.

    Explanation

    Step 1: IRS Publication 505 says the required annual payment is the smaller of 90% of the expected 2026 tax or 100% of the 2025 tax. Step 2: Because 2025 AGI was more than $150,000, 110% replaces 100%. Step 3: 90% x $60,000 = $54,000. Step 4: 110% x $40,000 = $44,000. Step 5: The smaller amount is $44,000. Choosing $40,000 uses 100% and misses the higher-income rule. Choosing $54,000 takes the larger amount instead of the smaller one. Choosing $60,000 uses the full expected 2026 tax.

    Sources

  6. Business Finances

    6. A new contractor is estimating its start-up costs. According to the SBA, which cost will it most likely have to estimate, because the cost is less certain?

    • A. Fees for a city business license
    • B. Fees for local building permits
    • C. Fees for a state contractor license
    • D. Salaries for new field employees
    Show answer

    Correct answer: D

    • A. Fees for a city business license

      A city business license is a license, and the SBA says permits and licenses tend to have clear, published costs. So it does not need to be estimated.

    • B. Fees for local building permits

      Local building permits are permits, which the SBA says tend to have clear, published costs. That makes them a well-defined cost, not an uncertain one.

    • C. Fees for a state contractor license

      A state contractor license is a license with a clear, published cost, according to the SBA. It is not the less certain cost.

    • D. Salaries for new field employees

      Correct answer

      The SBA gives employee salaries as an example of a less certain cost you might have to estimate. That makes salaries for new field employees the best answer.

    Explanation

    The SBA says some expenses have well-defined costs: permits and licenses tend to have clear, published costs. It says you might have to estimate other costs that are less certain, like employee salaries. Business license fees, building permit fees, and contractor license fees are all permits or licenses with published costs, so they are not the uncertain cost.

    Source

  7. Business Finances

    7. A contractor starts a new business as a sole proprietor on July 1, 2026. Before that date, it had no income subject to estimated tax. It expects to owe estimated tax on its 2026 business income. According to IRS Publication 505, when is its first 2026 estimated tax payment due?

    • A. April 15, 2026
    • B. June 15, 2026
    • C. September 15, 2026
    • D. January 15, 2027
    Show answer

    Correct answer: C

    • A. April 15, 2026

      April 15 is a due date for an earlier period, when this contractor had no income subject to estimated tax. The first payment is due for the period when income starts.

    • B. June 15, 2026

      June 15 is also for an earlier period, before the business started on July 1. The contractor had no income subject to estimated tax then.

    • C. September 15, 2026

      Correct answer

      Income that first comes in from June 1 through August 31 has its first payment due September 15. The business started July 1, which falls in that period.

    • D. January 15, 2027

      January 15, 2027 is the due date for the last period, which is the next installment after September 15. It is not the first payment here.

    Explanation

    IRS Publication 505 says that if you do not have income subject to estimated tax until a later payment period, your first payment is due by the due date for that period. Income that first comes in from June 1 through August 31 has a first payment due September 15, with the next installment due January 15 of the next year. The April 15 and June 15 dates are for earlier periods, when this contractor had no such income. January 15, 2027 is the due date for the last period, not the first payment here.

    Sources

  8. Business Finances

    8. A contractor is not sure a new type of compact loader will suit its work. It wants to try one before making a long commitment. According to the SBA, which option fits this goal?

    • A. A short-term lease, so it can test out the loader
    • B. A long-term lease, so the monthly payments are lower
    • C. Buying it with cash, so it owns the loader right away
    • D. Buying it with a loan, so the cost is spread out
    Show answer

    Correct answer: A

    • A. A short-term lease, so it can test out the loader

      Correct answer

      The SBA lists "Short-term leases let you test out the equipment" as a benefit of leasing. That fits a contractor that wants to try the loader before a long commitment.

    • B. A long-term lease, so the monthly payments are lower

      A long-term lease is the opposite of a short trial. The SBA ties the chance to test out equipment to short-term leases.

    • C. Buying it with cash, so it owns the loader right away

      Buying with cash gives ownership right away, but it does not let the contractor try the loader first. The SBA lists less chance to test out the asset as a disadvantage of buying.

    • D. Buying it with a loan, so the cost is spread out

      A loan spreads out the cost, but buying still gives less chance to test out the asset, according to the SBA. It does not let the contractor try the loader first.

    Explanation

    The SBA lists "Short-term leases let you test out the equipment" as a benefit of leasing. It lists less chance to test out the asset as a disadvantage of buying. Buying with cash or a loan gives ownership or spreads the cost, but it does not let the contractor try the loader first. A long-term lease is the opposite of a short trial.

    Sources

  9. Business Finances

    9. According to the SBA, which of these is a fixed cost for a contractor?

    • A. Lumber bought for each new job
    • B. Concrete ordered for each foundation
    • C. Monthly lease payment for the shop
    • D. Dump fees charged for each load
    Show answer

    Correct answer: C

    • A. Lumber bought for each new job

      Lumber bought for each new job goes up or down with the number of jobs, so it is not a fixed cost. The SBA says fixed costs do not change with production or services.

    • B. Concrete ordered for each foundation

      Concrete ordered for each foundation goes up or down with the number of jobs, so it is not a fixed cost.

    • C. Monthly lease payment for the shop

      Correct answer

      A monthly shop lease stays the same no matter how many jobs the contractor does. The SBA lists rental lease payments as an example of a fixed cost.

    • D. Dump fees charged for each load

      Dump fees charged for each load go up or down with the number of jobs, so they are not a fixed cost.

    Explanation

    The SBA says fixed costs do not change when production or services go up or down. It lists rental lease payments, salaries, property taxes, insurance, interest, and depreciation as examples. A monthly shop lease stays the same no matter how many jobs the contractor does. Lumber, concrete, and dump fees go up or down with the number of jobs, so they are not fixed costs.

    Sources

  10. Business Finances

    10. Before opening, a new contractor had $53,000 of business start-up costs. According to IRS Publication 583, how much of these start-up costs can the contractor elect to deduct right away?

    • A. $0
    • B. $2,000
    • C. $3,000
    • D. $5,000
    Show answer

    Correct answer: B

    • A. $0

      Going over $50,000 does not wipe out the whole deduction. The $5,000 limit is only reduced by the $3,000 excess, leaving $2,000.

    • B. $2,000

      Correct answer

      Up to $5,000 can be deducted, reduced by the amount over $50,000: $53,000 - $50,000 = $3,000, so $5,000 - $3,000 = $2,000. The rest must be amortized.

    • C. $3,000

      $3,000 is the amount the start-up costs exceed $50,000, which is the reduction, not the deduction. Subtracting it from $5,000 leaves $2,000.

    • D. $5,000

      This forgets the reduction. Because the start-up costs exceed $50,000 by $3,000, the $5,000 deduction drops to $2,000.

    Explanation

    Step 1: IRS Publication 583 says you can elect to deduct up to $5,000 of start-up costs. Step 2: The $5,000 is reduced by the amount the start-up costs are more than $50,000: $53,000 - $50,000 = $3,000. Step 3: $5,000 - $3,000 = $2,000. The rest must be amortized (deducted a little at a time over several years). Choosing $5,000 forgets the reduction, choosing $3,000 uses the excess amount by mistake, and choosing $0 wrongly assumes any costs over $50,000 lose the whole deduction.

    Source

Keep studying

Read the Section 2 study notes: Business Finances