Tax Glossary
Our team of experts as Excel CPAs has decoded it all into plain English. Whether it’s accelerated depreciation, carrybacks, or quasi-reorganizations, we’ll explain key tax concepts clearly so you can gain a deeper understanding.
0-9
A 1031 exchange is when a real estate investment property is purchased using the proceeds from another investment property of like kind and equal or greater value. It allows capital gains taxes to be deferred. A qualified intermediary must be used.
A
In accounting, an allowance for doubtful accounts is an approved reduction in the value of an asset, usually accounts receivable, based on an analysis from management about the likelihood of all payments being made by clients/customers.
Example: An allowance for doubtful accounts has reduced the value of our outstanding bills based on reliability of customers making payments.
Accounts-Receivable (AR or A/R) is the amount of money owed to a business for services rendered that has not been paid back by a customer.
B
A business entity is the type of organization a person or group creates to conduct business. A business’s entity type will determine how it is taxed. Common business entities include C corporations, S corporations, partnerships, LLCs and sole proprietorships (Schedule C).
A beneficiary is a person (or people) you designate to receive distributions from financial accounts, such as a trust, will or retirement account. This can be during life or upon your death
Bonus depreciation allows businesses to deduct a more significant percentage of the cost of purchasing eligible assets immediately, rather than spreading the deduction across several years.
The basis is the amount you may subtract from the sale price of an asset to determine your taxable gain. Typically, the basis is the amount you paid for an asset. When you are given or gifted an asset from someone else, your basis in the property is the same as what it was for the original owner/purchaser.
C
In accounting, a chart of accounts (COA) is a listing of all accounts a business has made available in the general ledger.
In accounting, Closing Entries are the final entries into a journal at the end of an accounting period to move temporary balances to permanent accounts.
A Coverdell Education Savings Account (ESA) is a trust or custodial account for a designated beneficiary to pay for qualified education expenses. Contributions to a Coverdell ESA are made with after-tax funds and are not deductible, but earnings are not taxed if withdrawals meet certain requirements. Coverdell ESAs must be held by a qualified institution, such as a bank or trust, and individuals, corporations and trusts can make contributions.
Corporate income tax is the tax the federal government and some state governments impose on a company’s taxable income. The federal corporate income tax rate is currently 21%, while state income tax rates for corporations vary.
D
Dividends Declared are dividends that a business has decided to pay out to investors but have not fulfilled yet and are considered liabilities until paid.
Generally, a donor-advised fund (DAF) is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor contributes, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges over the distribution of funds and the investment of assets in the account.
For tax purposes, a dependent is a person who relies on someone else to support them financially (e.g., a child or other relative).
A nonqualified deferred compensation (NQDC) plan is an agreement between an employee and their employer to pay some portion of the employee’s compensation in the future. It may be dependent on the employee completing certain requirements — such as years of service or honoring the terms of a non-competition agreement — or it may simply be an agreement to pay some of their current salary at a future time.
Deferral is any account where the entries for a payment cannot be reported because the product or service has not been delivered to the customer.
E
Expenses are any cost that a business incurs as a result of operations.
Employers who recognize their employees’ achievements through a qualified employee achievement award program may be able to take a tax deduction. Awards given by employers to employees, whether paid in cash or property, are generally deductible to the employer and considered taxable income to the employee. But certain gifts of tangible personal property may qualify for exclusion from the employee’s income while still being deductible for the employer.
An estate tax is a tax that applies when assets are transferred to heirs upon the estate owner’s death. It is imposed on the decedent’s estate as opposed to the heirs.
Elective deferrals are amounts an employer contributes to an employee’s retirement plan at the employee’s election.
Earned income is the amount of money you earn from working at a business, whether you own the business or are employed by someone else.
An excise tax is a required tax levied on a specific good or service that typically must be paid for by a business. The tax is usually passed onto consumers through increased prices. Taxes on gas, alcohol, airline tickets or tobacco are examples. A specific excise tax requires a set tax amount for a product per unit purchased, while an ad valorem excise tax requires a set percentage for a product based on the total cost.
Elective deferrals are amounts an employer contributes to an employee’s retirement plan at the employee’s election.
F
An FOB (Free on Board) Destination is a term used to describe when a Buyer agrees to take delivery of products from a Seller. With FOB Destination, the Seller will retain the risk of loss until the products reach the Buyer.
A franchise tax is a tax imposed by a state on a business entity for the privilege of doing business in that state. The tax calculation is typically based on the business’s capital or net worth.
The Federal Insurance Contributions Act, or FICA, allows certain employers to claim a tax credit based on employee tips. Suppose you own a business in the food and beverage industry where tipping is customary. In that case, you can claim the FICA tax credit for the social security and Medicare taxes you paid on your employees’ tips.
FUTA stands for Federal Unemployment Tax Act and is a payroll tax that employers pay to the federal government for unemployment benefits. Employers must file Form 940 with the IRS to pay FUTA.
A family office management company is a management and financial advisory service company a family can start that generates income from management contracts with its other family businesses. The revenue can be converted into salaries, benefits and business expenses for family members in varying tax brackets. Some of the fees the family might normally pay to outside advisors can instead be paid to a family subsidiary that can hire family members who earn salaries in exchange for managing family business interests.
G
In a partnership, partners cannot pay themselves salaries via payroll. Still, they can provide for “guaranteed payments,” which are distributions that are not determined by the partnership’s income or their proportionate share.
The gift tax is imposed on transfers of assets from one person to another during their lifetime if the gift is in excess of the lifetime exemption.
Gross receipts are the total annual gross revenue a company brings in from all sources.
Gross income is the total of a person’s earnings before taxes or other deductions are taken out.
H
Historical Cost is a measure of value in which the value of an asset on the balance sheet is recorded at its original cost to the business upon acquisition.
A health savings account (HSA) allows individuals with high-deductible health plans to build tax-advantaged savings for qualified medical expenses. Employers offer the HSA, and both employers and employees can contribute to the account. Contributions are tax-deductible to the employee, and distributions are not taxable if they are made for qualified health costs.
Home office expenses that may qualify for the home office deduction include utilities, homeowners insurance, homeowners association fees, security, cleaning, pest control, maintenance, mortgage interest and property taxes.
A high-deductible health plan (HDHP) is a health insurance plan with a higher deductible than most health plans that typically come with lower monthly premiums. Individuals must have an HDHP to start a health savings account (HSA).
I
The IMA stands for Institute of Management Accountants.
Individual income tax is a tax imposed by a government entity on the total income an individual earns in a year. This income is the total of amounts earned from wages/salaries, dividends and interest, among any others the individual may have.
During an IRS audit, a business or individual’s accounts and financial information are reviewed to ensure tax-related information has been reported correctly.
An installment sale is an asset sale where the buyer makes payments to the seller over time rather than in one payment upfront. The seller and buyer enter into an agreement where the buyer pays a portion of the total payment in the first year and agrees to make payments over a set period, including interest, backed by a promissory note. In exchange, the seller transfers ownership of the property to the buyer.
Incurred is when a business owes money as a result of a transaction and must be recorded.
J
A Journal Entry is a record of transactions used in financial reporting to understand accounts and balances for a business.
Example:
Technology Expenses for Acme Holdings
Debit Credit
Cash $5,000
Marketing Software $190
Sales Tax $58
Jurisdiction is the legal authority, power or right to enact or enforce the law within a given territory or scope. It may refer to the country, state or federal level.
A joint venture is a business agreement between two or more people (or groups of people) who combine resources to fulfil a business activity, typically for creating a profit. A joint venture can be formed under any business entity structure, including a corporation, partnership or LLC.
K
A Keogh plan is a profit-sharing pension plan self-employed individuals can set up to help them save for retirement. It is typically created as a defined-contribution plan, where contributions are tax-deductible up to a percentage of income. They are common with business owners who are sole proprietors or in a partnership.
The kiddie tax is a special provision in the tax code that addresses dependent children’s unearned income (investment or passive income). The first $1,150 of unearned income is not taxed, and if the child earns more than $2,300 in investment income, that income is taxed at the parent’s marginal rate. The tax applies to dependents up to the age of 23 if they are providing less than half their own support.
L
Liabilities are any debt a business must pay and they are commonly in the form of loans, outstanding payments, and wages.
Legal Capital is a certain amount of equity that a business entity is not allowed to withdraw from the business; Legal Capital can not be distributed to shareholders or investors in any form including dividends.
A 1031 exchange is when a real estate investment property is purchased using the proceeds from another investment property of like kind and equal or greater value. It allows capital gains taxes to be deferred. A qualified intermediary must be used.
In accounting, Losses are incurred when a company’s sales are less than its revenues.
M
A Market Interest Rate is a flexible interest rate that is determined by a combination of central bank rates, available liquidity, maturity rate and more.
A master limited partnership (MLP) is a publicly-traded limited partnership that receives the tax benefits of a private partnership (i.e., business profits are taxed only when investor distributions are taken) and can also benefit from the liquidity offered by being a publicly-traded company.
Month-over-month (MoM) refers to comparing a set of data at one point in a given month, compared with the data collected at that same point in other months. For example, comparing data from February 1, March 1 and April 1 would be a month-over-month comparison.
Married filing separately is a tax filing status. It refers to when each person in a married couple files their own tax return, rather than filing together on one return.
N
The net investment income tax (NIIT) is a 3.8% tax on investment income applied to high-income individuals. This income can be from capital gains, dividends and/or rental properties.
A net operating loss happens when the amount of tax deductions (usually as expenses) a company can take is greater than its total income.
O
Operating Expenses (OPEX) are the recurring expenses required to run a business like staff salaries, inventory costs and rent.
The Tax Cuts and Jobs Act created Opportunity Zones to allow investors to invest unrealized capital gains into the economic development of undercapitalized communities and receive tax benefits and incentives for doing so.
P
A Principal Payment is a payment that goes toward the original amount of the loan, or the principal.
A profit-sharing plan is a defined-contribution plan that allows employers to make retirement contributions for their employees. Contributions are discretionary and can be made in any year, even if the business doesn’t earn a profit.
A partnership is an entity owned by two or more people as a trade or business. Each partner contributes money, property, labor and/or skill and shares in the profits and losses of the company. A partnership does not pay tax at the partnership level but instead passes the income, deductions, gains, losses, etc. from its operations through to its partners. Each partner reports their share of the partnership’s income or loss on their personal tax return.
In accounting, prorating is allocating costs in a logical manner over a set of categories.
Passive income comes from an activity in which an individual is not actively involved, such as a rental property or a business the individual does not play an active role in. The IRS collects income tax on passive income.
Proceeds are money from the sale of goods or services. Proceeds can be either gross or net. Gross proceeds are the total amount of money received, while net proceeds are the amount of money received after expenses.
In a pass-through entity, income generated through a business is passed on directly to the business owners. The revenue is only taxed at the individual level, not the entity level. This allows the business income to avoid being subject to double taxation.
Q
Quarter-over-quarter (QoQ) compares a set of data at one point in a given quarter, compared with the data collected at that same point in other quarters. For example, comparing data from a company’s Q1, Q2 and Q3 of 2021 would be a quarter-over-quarter comparison.
An education assistance program is a written plan business can create to provide financial support for their employees’ education expenses. Suppose the plan meets the requirements of IRC Section 127. In that case, the distributions made to employees are deductible from the business’s taxable income and payments of up to $5,250 per year are excludable from the employees’ wages.
In the context of retirement plans, a qualified plan meets the IRS requirements to receive certain tax benefits. The requirements have to do with the type of investments available through the plan and when distributions can be made. There are two types of qualified plans: defined benefit plans and defined contribution plans.
R
Revenue is the total amount of income a company generates from the sale of products or services.
In the context of the employee retention credit, a recovery startup business is one that started on or after February 15, 2020, and has annual gross receipts of less than $1 million. These businesses can take a maximum credit of $50K in Q3 2021. The credit is claimed against the employer portion of the Medicare (HI) tax.
A Roth 401(k) plan is an employer-sponsored retirement plan that allows employees to make contributions to their retirement account using income that has already been taxed.
S
When you inherit an asset, such as real property, your basis in the property is increased or “stepped-up” to be equal to the fair market value of the asset as of the decedent’s date of death.
A solo 401(k) plan is a qualified employer-sponsored retirement plan for business owners (and spouses) who have no employees. Business owners may make salary-deferral contributions on a pretax or after-tax basis, and earnings on those contributions accumulate tax deferred or tax-free, respectively.
SIMPLE (short for “Savings Incentive Match Plans for Employees of Small Employers”) 401(k) plans allow businesses to offer a salary-deferral retirement plan to employees without being subject to the nondiscrimination and “top-heavy” rules that make traditional 401(k) plans more difficult and costly to administer. SIMPLE 401(k) plans are an option for businesses with no more than 100 employees who earned at least $5K in the previous calendar year, as long as the firm does not offer any other retirement plans. SIMPLE plans have lower contribution limits than traditional 401(k)s.
In a 412(e)(3) plan (sometimes called an insurance contract plan), each employee participant is provided with a guaranteed, predetermined benefit amount that is defined by the plan document. These plans can only be funded by the employer’s purchase of fixed annuities or life insurance and annuity contracts. Because plan benefits are guaranteed, 412(e)(3) plans are exempt from the funding requirements of IRC Section 412.
T
A trustee is a person or organization appointed to maintain assets on behalf of the person the assets belong to.
Tax planning is the process of analyzing a person’s or company’s financial situation and applying strategies to pay the lowest amount of taxes based on their facts and circumstances. Tax planning considers many factors, including cash flow, timing and reporting of income, tax credits, deductions, investments and expenditures. At its core, tax planning is about understanding how business and life decisions affect most people’s largest expense — taxes.
An exemption is a portion of your income or other taxable asset that the government deems to be exempt from taxation.
A traditional 401(k) plan is a workplace retirement account offered by an employer. An employee makes pretax contributions to the account through payroll deductions. The 401(k) funds will be taxed as ordinary income when the employee takes distributions in the future.
W
Wages payable are the amount of money a business owes to its workers but has not paid out yet. Wages payable are considered a current liability to the company.
In the context of tax loss harvesting, the “wash sale” rules state that your loss will not be allowed if, within 30 days before or after the sale of the security, you or your spouse invest in a security that is the same — referred to by the IRS as “substantially similar” — as the one you sold.
In tax, a write-off is an officially recognized business expense that can be deducted from taxable income.
Example: Home office expenses like high-speed internet and standup desks are potential write offs if you run your company from home.
Form W-2, also known as the Wage and Tax Statement, is provided to all wage employees by their employer at the end of each year. It lists the employee’s wages and all taxes withheld from their income, and the employee reports this information on their tax return.
Y
Year-to-date (YTD) refers to the time between the first day of the current year up to the current day.
Year-over-year (YoY) refers to comparing a set of data at one point in a given year, compared with the data collected at that same point in other years. For example, comparing data from February 2022, February 2021 and February 2020 would be a year-over-year comparison.
Z
A zero-cost strategy is when a business or investment decision is made that does not cost anything to carry out.
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