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.
Small Business Tax Terms
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 is the reported value of an asset, on which any taxable gain or loss is calculated when the asset is sold.
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.
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 refers to the initial cost from which a gain or loss is calculated.
This refers to spending that is ordinary and necessary to carry on a business.
Income received from the sale of products or services.
Accounting method that says a transaction is taxed when payment is made.
An amount for which taxes have already been paid.
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.
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.
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.
A person who performs services for you.
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.
A special tax on using or selling certain products or services. One example of excise taxes is luxury taxes.
Use this tax return to report income from wages, salaries, and tips.
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.
And report your estimated tax for individuals here.
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.
The 1099-MISC form reports the total amount of payments you receive from a single person or entity during the year you provided service.
Use his form for employee business expenses.
Use this for Social Security and Medicare Tax on unreported tip income.
Claim for Refund and Request for Abatement
IRS e-file Signature Authorization
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.
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.
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.
Application for IRS Individual Taxpayer Identification Number.
This is all income received in the form of money, goods, property, and services that is not exempt from tax.
An area of your home used primarily or exclusively for business purposes, for which you may be able to take certain deductions.
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.
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.
A tax charged by a local government, such as a city or county.
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.
Any income exemption from federal income tax.
This refers to a tax paid for valuable property. For example, this might include real estate or vehicles.
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.
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.
A tax on retail products, goods, and services. It is based on a certain percentage of the price.
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.
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.
This amounts to a dollar-for-dollar reduction in the tax. As a result, you can deduct this directly from taxes owed.
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 refers to taxes that are payable to a taxing authority. But it also refers to accrued for payment on a future date.
Taxable income amounts to a taxpayer’s gross income minus any allowable tax deductions
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.
The entire body of tax laws, regulations, and procedures.
A reduction of tax rates.
This refers to a situation when taxes levied now are owed at a later time. For example, consider interest on investments.
This refers to hiding income from the IRS. For example, this might include deliberately underpaying taxes or using an abusive tax scheme.
This refers to the percentage of income that is owed as tax.
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.