Small Business Glossary for Tax Terms

No one doubts the complexity of the Tax Code. And these complications arise from the tax terms in accounting. But they also arise from what the IRS uses in all its tax forms.

This glossary serves as a quick reference guide. With that in mind, use it to find out what exactly the tax terms mean.

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Small Business Tax Terms

Accrual Basis

A method of recording income or transactions for revenue when earned and expenses when incurred. It requires the use of allowances for sales returns, bad debts, and inventory obsolescence, which are in advance of such items actually occurring.

Actual Expense Method

A method for calculating business automobile expenses. It determines the business portion of expenses for fuel, auto maintenance, parking fees and tolls, and auto loan interest. Also a method for figuring the home office deduction.

Adjusted Basis

Adjusted basis is the reported value of an asset, on which any taxable gain or loss is calculated when the asset is sold.

Allocated Tips

Tips an employer assigns to an employee. They are in addition to the tips the employee reported to the employer.

Alternative Motor Vehicle Credit

You may, under certain circumstances, claim a credit for an alternative motor vehicle placed in service for business or personal use. Refer taxpayers who choose to claim this credit to a professional tax preparer.

Amount Realized

The amount realized is the selling price minus selling expenses commissions, advertising fees, legal fees, and loan charges paid by the seller, such as points.

Basis

Basis refers to the initial cost from which a gain or loss is calculated.

Business Expenses

This refers to spending that is ordinary and necessary to carry on a business.

Business Income

Income received from the sale of products or services.

Cash Method

Accounting method that says a transaction is taxed when payment is made.

Cost basis

An amount for which taxes have already been paid.

Deferred Compensation

It allows an employee to receive part of a year’s pay in a later year and not be taxed in the year the money was earned.

Depreciation

This describes a planned, gradual reduction in the recorded value of an asset over its useful life by charging it to expense. As a result, businesses usually expect to spread expense recognition over the period of time when a business expects to earn revenue from the use of an asset.

Earned Income

Any income received for work, such as wages or business income. Earned income also includes net earnings from self-employment and other income received for personal services.

Electronic Filing (e-file)

The computer transmission of a tax return directly to the IRS.

Employee

A person who performs services for you.

Excludable Income

Income that is not included in the taxpayer’s gross income and therefore exempt from federal income tax. Certain income may be exempt from tax but must be reported on the tax return.

Excise Tax

A special tax on using or selling certain products or services. One example of excise taxes is luxury taxes.

Form 1040

Use this tax return to report income from wages, salaries, and tips.

Form 1040-SR

Use this Tax return to report income and deductions for those age 65 and older.

Form 1040 Schedule A

Use this for for itemized deductions.

Form 1040 Schedule B

Use this one for interest and ordinary dividends.

Form 1040 Schedule C

You can use this for net profit from business.

Form 1040 Schedule D

While this form reports capital gains and losses.

Form 1040 Schedule E

Use this to record supplemental income and loss.

Form 1040 Schedule SE

Report your self-employment tax on this form.

Form 1040ES

And report your estimated tax for individuals here.

Form 1040X

This serves as your Amended U.S. Individual Income Tax Return. Use it to modify a previously filed tax return.

Form 1065 Schedule K-1

Report a Partner’s Share of Income, Deductions, Credits, etc. on this form. Use the form primarily for partnerships to report the taxpayers’ share of the partnership’s income, deductions, credits, etc.

Form 1099

The 1099-MISC form reports the total amount of payments you receive from a single person or entity during the year you provided service.

Form 2106

Use his form for employee business expenses.

Form 4137

Use this for Social Security and Medicare Tax on unreported tip income.

Form 843

Claim for Refund and Request for Abatement

Form 8879

IRS e-file Signature Authorization

Form W-2

Wages and Tax Statement, issued by employers to report their employees’ earned income for the year. Generally, employers should issue Form W-2 to every employee and a copy to the Social Security Administration.

Form W-4

Employees must complete the Employee’s Withholding Certificate. And employers use it to determine how much to withhold from an employee’s paycheck for federal income tax purposes.

Form W-5

Earned Income Credit Advance Payment Certificate, used by taxpayers who have a qualifying child, may be eligible for the earned income credit, and choose to get advance EIC payments.

Form W-7

Application for IRS Individual Taxpayer Identification Number.

Gross Income

This is all income received in the form of money, goods, property, and services that is not exempt from tax.

Home Office

An area of your home used primarily or exclusively for business purposes, for which you may be able to take certain deductions.

Independent Contractor

This description refers to a person who completes tasks for a business, but does not work for it as an employee. As a result, an independent contractor must pay self-employment tax.

Indirect Tax

A tax that is not paid directly, but which is paid through a cost increase, such as sales tax.

Internal Revenue Service (IRS)

A bureau of the Department of the Treasury, the IRS is the government agency responsible for collecting taxes and for enforcing the tax code.

Local Tax

A tax charged by a local government, such as a city or county.

Luxury Tax

An indirect tax, targeted at the wealthy, attached to certain expensive, nonessential goods or services such as sports cars or jewelry.

Marginal Tax Rate

The tax rate that applies to the last dollar of income earned.

Net Operating Loss

The excess of business expenses over income. As a result, an unused amount can also carry it forward as a deduction to future years.

Nontaxable Income

Any income exemption from federal income tax.

Property Tax

This refers to a tax paid for valuable property. For example, this might include real estate or vehicles.

Payroll Tax

Payroll taxes get imposed on employee wages and salaries. As a result, employers may solely withhold this from employee pay or must must match withholding. In some instances and employer alone must pay the tax. This tax must also be paid by a self-employed person.

Qualified Business Income

Income on which owners of pass-through entities can figure a personal deduction.

S Corporation

The term refers to a corporation with no more than 100 shareholders treated similarly to a partnership, if other requirements are met. As a result, it pays no corporate taxes.

Sales Tax

A tax on retail products, goods, and services. It is based on a certain percentage of the price.

Self-Employment Tax

The tax paid by self-employed taxpayers to support Social Security and Medicare.

Standard Mileage Method

This refers to a specific amount per mile driven for business, charitable, or medical purposes. As a result, you may deduct it from your taxable income.

Statutory Employee

If workers are independent contractors, they can be treated as employees by statute for certain employment tax situations.

Straight Line Depreciation

A depreciation method for equal deductions in each year of an asset’s “life” or recovery period.

Tax Credit

This amounts to a dollar-for-dollar reduction in the tax. As a result, you can deduct this directly from taxes owed.

Tax Deduction

This refers to a reduction of the adjusted gross income of a taxpayer, As a result,  you reduce personal or business income tax liability.

Tax Liability

Tax liability refers to taxes that are payable to a taxing authority. But it also refers to accrued for payment on a future date.

Taxable Income

Taxable income amounts to a taxpayer’s gross income minus any allowable tax deductions

Tax Bracket

This term describes a range of incomes that is taxed at a specified tax rate. For example, you could describe it as the bracket into which the last dollar of one’s income falls.

Tax Code

The entire body of tax laws, regulations, and procedures.

Tax Cut

A reduction of tax rates.

Tax-Deferred

This refers to a situation when taxes levied now are owed at a later time. For example, consider interest on investments.

Tax Evasion

This refers to hiding income from the IRS. For example, this might include deliberately underpaying taxes or using an abusive tax scheme.

Tax Rate

This refers to the percentage of income that is owed as tax.

Tax Year

This term describes the 12-month period covered by a tax return. As a result, you usually file returns for a specific tax year in the subsequent year.

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