Utah Contractor Practice Exam

Income taxes for contractors are based on:

1. Net profit

2. Gross profit

3. Sales

4. Percentage of profit

The correct answer is: Net profit

Income taxes for contractors are based on net profit because this figure represents the income remaining after all allowable expenses have been deducted from total revenues. Net profit gives a true reflection of a business's financial performance over a period and is what the government taxes. This ensures that taxes are only assessed on the actual earnings the contractor has after covering all the operational costs, such as labor, materials, overhead, and any other expenses involved in running the business. In contrast, gross profit refers to revenue minus the cost of goods sold, and while it's useful for understanding a business's earnings without considering overhead and other expenses, it's not what taxes are calculated on. Sales represent total income before any deductions, and taxing on sales would not accurately reflect the profitability of the contractor. The percentage of profit is not a standard measurement for tax calculations, as the tax system does not operate on a flat percentage of profit but on the net income reported.