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Glossary: The tax terms business owners and entrepreneurs must know

Posted by Kanika Sinha

July 16, 2021    |     10-minute read (1892 words)

  • Accrual basis: A method of recording accounting transactions in which revenue is recorded when earned and expenses when they are incurred, regardless of when the money is actually received or paid.
  • Actual expense method: A method for calculating expenses related to the use of an automobile for business purposes so as to claim deduction on the taxable income. It includes actual costs incurred to operate the vehicle such as fuel, repairs, maintenance, licenses, registration fees, depreciation and insurance as well as auto loan interest.                                                                         
  • Adjusted basis: Primarily used for computation of capital gain or loss on a sale, adjusted basis is the net cost of an asset or security wherein the original cost is increased by capital expenditures and reduced by depreciation deductions.
  • Allocated tips: Amounts assigned by an employer in addition to the tips reported by the employee. These are usually applicable to large food and beverage establishments where tipping is customary.
  • Alternative motor vehicle credit: A tax credit claimed for putting a qualified fuel cell vehicle in service during your tax year. This credit can be availed on IRS Form 8910.
  • Amount realized: The amount received from a sale or exchange. It is the total of all the cash received, and the fair market value of all property or services. And also includes the liabilities assumed by the purchaser during the transaction and any liabilities to which the property bought is subject, such as real estate taxes or even a mortgage. This figure is primarily used for the computation of realized gain and loss.
  • Basis: Basis refers to the initial value of an asset from which a gain or loss is determined during a sale. In most situations, the basis of an asset purchased is its cost to you. 
  • Business expenses: This refers to costs incurred to keep the business running, that is the necessary spending done in the ordinary course of the business.
  • Business income: Any Income received from the sale of products or services.
  • Cash method: A method of recording accounting transactions wherein revenue and expenses are recorded when cash is received or paid respectively.
  • Cost basis: Also known as the basis, it is the original cost of an asset used to figure gain or loss on the sale. 
  • Deferred compensation: This plan allows an employee to defer a part of his/her annual salary, and receive it later. The tax on such an amount also gets deferred, that is no tax is levied on the money in the year it was earned but later when received.
  • Depreciation: It is the recovery of the cost of an asset over a number of years. A part of the cost incurred is deducted every year by charging the expense till the full cost is recovered.
  • Earned income: Income received for personal services by working for someone else, or yourself. It includes salary, wages, commissions, tips and money made from self-employment or by operating a business. 
  • Electronic filing: Popularly called E-file, it is the submission of a tax return to the IRS through the internet.
  • Employee: Any person who performs services for you is your employee. In addition to paying regular wage or salary, you also have the right to direct and control the work performed by him/her, even if that right is not exercised. 
  • Excludable income: It is the income that is not included in your gross income as it is exempt from tax. However, it doesn’t mean that such an income should always go unreported, in fact, certain income though exempted are mandated to be reported on the tax return.
  • Excise tax: Tax levied on manufacture, sale or consumption of specific goods, services or activities. The most common example being taxes imposed on fuel, tobacco, and alcohol.
  • Form 1040: This form is used by individual taxpayers to file an annual income tax return under IRS.
  • Form 1040-SR: This is an alternative to using Form 1040 for U.S. senior taxpayers aged 65 or older. This form uses the same schedules and instructions as IRS Form 1040 does but in larger font.
  • Form 1040 Schedule A: This is used to report itemized deductions.
  • Form 1040 Schedule B: This schedule is used by taxpayers to report their interest and ordinary dividend income.
  • Form 1040 Schedule C: You can use this schedule to report income or loss from your business or sole proprietorship firm.
  • Form 1040 Schedule C-EZ: Qualifying small businesses can use this instead of using Schedule C to report their income.
  • Form 1040 Schedule D: This form can be used to report capital gains and losses.
  • Form 1040 Schedule E: This schedule is used to report any supplemental income and loss such as income from rental properties, royalties, estates, trusts, etc.
  • Form 1040 Schedule SE: You can use this form to figure your self-employment tax liability.
  • Form 1040ES: This form is used by individuals to figure and pay their estimated tax.
  • Form 1040-X: You can file your amended tax returns using form 1040-X.
  • Form 1065 Schedule K-1: This is meant for partnerships wherein a partner’s share of income, deductions, credits, etc. for the year can be reported.
  • Form 1099: It is a miscellaneous income form and is used to report taxable income other than wages, salaries, and tips received in the calendar year.
  • Form 1120: It is the U.S. corporation income tax return form and can be used by domestic corporations to figure their income tax liability as well as report their income, deductions, gains, losses, credits.
  • Form 2106: Employees can file this form to deduct ordinary and necessary expenses for their job — business, trade or profession. 
  • Form 4137: This form is used to figure the social security and Medicare tax owed on your unreported tips. 
  • Form 843: Use this to claim for refund or request for abatement of your overpaid or over-assessed taxes, interest, penalties.
  • Form 8879: This is the declaration document and signature authorization for a tax return e-filed by an e-file provider.
  • Form W-2: This form is used by employers to report wages, tips, and other compensation paid to employees including FICA and any withheld income taxes.
  • Form W-4: Filled by an employee, this certificate indicates his/her tax situation. And used by employers to determine the tax amount to withhold from the employee’s paycheck.
  • Form W-5: This is an earned income credit advance payment certificate, and can be used by eligible taxpayers to receive a portion of the tax credit in advance with their pay.
  • Form W-7: You can use this form to apply for your IRS individual taxpayer identification number (ITIN). Additionally, you can use it to renew your expired ITIN or an existing one that is near expiration.
  • Gross income: This represents the total income received from taxable sources, before making any adjustments, or applying deductions or exemptions.
  • Home office: It is a part of a person's residence used primarily or exclusively for business purposes, for which qualified taxpayers can claim home office deductions.
  • Independent contractor: Any person employed by a business, but does not work for it as an employee. As a result, he/she is subjected to self-employment tax.
  • Indirect tax: This tax is not levied directly on the income, revenue or profit of the taxpayer but added to the price of the goods or services rendered such as sales tax, excise tax. In other words, though the real incidence of the tax falls on the firms selling goods or services, they do not pay for it but pass it on to their consumers, who ultimately bear the tax burden. 
  • Internal Revenue Service (IRS): IRS is the U.S. federal government agency responsible for collecting taxes and administering the tax code.
  • Local tax: A tax levied and collected by a local government, such as a municipality or county.
  • Luxury tax: An indirect tax, imposed on certain goods and services that are deemed non-essential and accessible to the affluent. Such goods include expensive cars, sports vehicles, yachts and jewelry.
  • Marginal tax rate: The tax rate applicable on every additional dollar of taxable income earned.
  • Net operating loss: Under federal tax law, a net operating loss occurs when deductible expenses exceed taxable income within a tax period. The IRS allows you to claim a deduction on your NOL subject to certain conditions.
  • Nontaxable income: It is the income that is exempted by federal income tax.
  • Property tax: This refers to a tax charged on the property owned by the taxpayer. Also, referred to as the millage tax rate.
  • Payroll tax: This tax is imposed on the payroll of the employee. It is withheld directly from his/her pay by the employer who pays it to the federal government on the employee's behalf.
  • Qualified business income: It is the net amount of income on which owners of pass-through entities can claim a qualified business income deduction.
  • S corporation: It is a corporation with no more than 100 shareholders and is treated as a partnership if all the IRS stipulated requirements are met. And thus pays no corporate taxes, instead, its shareholders are taxed at their individual income tax rates.
  • Sales tax: A tax levied on the sale of retail goods, and services and is based on the purchase price.
  • Self-employment tax: A tax consisting of social security and Medicare taxes primarily for individuals who work for themselves.
  • Standard mileage method: This refers to a simple way to calculate the business use of your automobile. It involves tracking your mileage for the tax year and deducting the same from your taxable income.
  • Statutory employee: A statutory employee is an independent contractor who is treated as an employee by statute for certain employment tax situations.
  • Straight line depreciation: A method of depreciation that accounts for equal deductions every year of the recovery period, or asset’s life.
  • Tax credit: Simply put, it is a dollar-for-dollar reduction in tax liability. As a result, it directly trims down the amount of tax you owe. For example, a tax credit of $1,000 will lower your tax bill by the corresponding amount of $1,000.
  • Tax deduction: This refers to a reduction in your tax liability by lowering your taxable income, that is the amount of income subject to tax. For example, if you fall into the 22% tax bracket, a $1,000 deduction will save you $220.
  • Tax liability: It is the total amount of tax that you owe to the taxing authority. 
  • Taxable income: It is the taxpayer’s gross income adjusted for the allowable tax deductions. It determines the tax liability of the taxpayer. 
  • Tax bracket: It refers to a range of incomes that are subjected to a specified tax rate. 
  • Tax code: The entire body of tax rules, regulations, and procedures.
  • Tax cut: A reduction in the rate of tax charged by the government.
  • Tax-deferred: This refers to a situation wherein taxes levied now are delayed to a later time. 
  • Tax evasion: This refers to hiding or falsely reporting income to the IRS so as to reduce tax liability.
  • Tax rate: This refers to the percentage at which the taxpayer is taxed.
  • Tax year: It is the 12-month period covered by a tax return. As a result, returns for a specific tax year are filed in the subsequent year. For example, for the tax year 2021 — January 1 - December 31, 2021, tax returns will be due on April 15, 2022.

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