Taxes are the ever-ominous evil that makes even the most stoic entrepreneur break out in a cold sweat. While we can’t promise to make taxes fun, we can certainly spice up the conversation. That’s why our latest edition of the fortnightly glossary focuses on the buzz in the tax industry.
Forget the snooze-fest of IRS manuals and dull accounting books. We’re here to sprinkle some pizzazz into the perplexing realm of taxation. From quaint terms to modern jargon that’s reshaping the tax scenery, add these words to your entrepreneurial vocabulary to navigate the murky water of taxation like a boss.
Cryptocurrency gains tax
As the digital currency revolution marches on, so does the taxman’s interest in your crypto profits. You’ve ridden the rollercoaster of crypto markets, dodged FUD (fear, uncertainty, and doubt) like a pro, and emerged victorious with a treasure chest full of digital gold, only to have the taxman show up with his hand outstretched.
Cryptocurrency Gains Tax is the bittersweet reality of reaping rewards in the Wild West of digital currencies. It’s the levy imposed on the profits made from trading cryptocurrencies. You also have to pay tax if you get cryptocurrency as payment for any business transaction. Depending on your taxable income, you pay a 0%, 15%, or 20% tax. If your income is less than $44,626, including your crypto (for the 2023 tax year), you’re exempt from Capital Gains Tax for crypto.
Depreciation recapture
Let’s say you buy a shiny new piece of equipment for your business, and over time, its value depreciates. The rule of the universe is that everything lasts for a while, even the latest tech gadgets. But this is where things get interesting: the taxman can show up on your door if you sell that equipment for more than its current value (despite it depreciating over time).
It’s the IRS’s way of reclaiming some of the tax benefits you enjoyed initially purchasing the asset. So, next time you upgrade your business gear, remember to include Depreciation Recapture in your tax planning for small businesses—because even in the world of taxes, what goes around comes around.
Nexus
No, we’re not talking about the mystical connections between alternate dimensions. For business owners, Nexus has a different meaning altogether. Nexus refers to a business’s sufficient connection with a state to be subject to its tax laws.
Let’s say you’re running a small online shop from your cozy home office in New York. Still, you start selling your products to customers in California. Suddenly, you’ve crossed into California’s tax territory, where Nexus kicks in. Suppose your business has enough of a connection with a state. In that case, you’re subject to that state’s tax rules, whether through physical presence like an office or a warehouse or hitting a certain threshold of sales or transactions within the state.
Capital allowances
Imagine if the government rewarded you with a tax break for splurging on business assets like machinery or equipment. Congratulations, because that’s precisely what Capital Allowances are — deductions you can claim for the wear and tear of certain business assets. It’s like the government saying, “Hey, thanks for boosting the economy, let us lighten your tax load a bit.”
But how does it work? Instead of deducting the total equipment cost in one go, you spread it out over several years, claiming a portion of the yearly expense as a deduction on your taxes. Think of it like breaking a big meal down into bite-sized portions. So, next time you’re eyeing a shiny new piece of machinery, consider capital allowances in your tax planning to make your wallet a little happier.
Amortization
Okay, you’ve splurged on exciting new business software with all the bells and whistles. Instead of shelling out all that cash upfront, you can spread out the cost of such an intangible asset over its useful lifespan. This is called amortization.
Instead of feeling the financial pinch all at once, you can enjoy the benefits of that software while paying for it steadily. You don’t have to face the daunting prospect of small business tax compliance all at once; you can savor the sweet taste of tax relief one transaction at a time.
The road ahead
And there you have it—five buzzworthy words lighting up the tax industry. Whether you’re a seasoned entrepreneur or just dipping your toes into business ownership, these terms can help you maneuver the complex terrain of taxation with confidence and finesse. So, go forth, brave pioneers of the business world, and tackle tax season like a pro.
Want to know more? Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, bookkeeping, taxes, HR, payroll, insurance, and recruiting — and we can help yours, too. Talk to an expert today.
