Dictionary

A situation that occurs when the asset is determined to have a market value or a value in use less than its book value.

Taxpayers cannot sell property under a deferred payment contract in which no interest or unrealistically low interest is charged and realize all capital gains or increased capital gains on the sale. Unstated or imputed interest is taxable to the seller as ordinary interest income.

The incentive stock option is a statutory employee stock option. No income tax consequences result from the grant or exercise of such an option, and, if holding and other requirements are met, gain on eventual sale of the employer's stock will be long-term capital gain.

Income, in its broad sense, is the gain derived from capital, labor, or both. It is distinguishable from the capital itself. Ordinarily, for income tax purposes, the word income is not used alone. It is used in conjunction with such descriptive terms as gross income, taxable income, and adjusted gross income, all of which are defined herein.

A special owner's equity account that is sued only in the closing process to summarize the results of operations.

All income from U.S. sources which is effectively connected with the conduct of a trade or business in the United States is taxed to nonresident aliens and foreign corporations at the same rates as apply to U.S. citizens and domestic corporations. Investment and other fixed or determinable periodical income (interest dividends, rents, wages, etc.) of a nonresident alien is taxed at a flat 30 percent rate, whether or not the recipent engages in a trade or business in the United States, so long as such income is not effectively connected if it is derived from assets used in, or held for use in, the United States, and if the activities of the U.S. business are a material factor in the realization of the income.

A formal report of business operations covering a specific period of time; also called a profit and loss statement or a statement of income and expenses.

Levy on the earnings of most employees that is deducted from their gross pay.

A method of recording the trade-in of an asset for income tax purposes. It does not permit a gain or loss to be recognized on the transaction.

Income-shifting is the transfer of income from one family member to another who is subject to a lower tax rate or the selection of a form of business that decreases the tax liability for its owners.

One who is paid by a company to carry out a specific task or job but is not under the direct supervision or control of the company. Also, a person who follows an independent trade, business, or profession where services are offered to the public.

A means of reporting cash generated from operating activities by treating net income as the primary source of cash in the operating section of the statement of cash flows and adjusting that amount for changes in current assets and liabilities associated with the net income, noncash transactions, and other items.

Any individual may contribute 100 percent of earned income, up to $5,500 a year, to an IRA ($11,000 on a joint return, i.e. $5,500 per spouse). Taxpayers over age 50 are allowed to contribute an additional $1,000. The contributions are deductible from gross income, except for individuals who participate in a qualified deferred compensation plan with AGI over a certain level ($61,000 in 2016, and for joint filers, $98,000 in 2016. The investment grows tax-deferred, but all withdrawals constitute gross income. A 10 percent penalty on gross income is levied on pre-age 59 1/2 withdrawals, except on account of disability, death, first-time home purchases (up to $10,000), insurance premiums for the unemployed, deductible medical expenses, as well as withdrawals in the shape of annuities. Withdrawals must start with respect to the year the participant reaches age 70 1/2. An IRA may receive tax-deferred rollovers from other qualified plans, including other IRAs. Distributions from IRAs are not subject to withholding.

An employee record that contains information needed to compute earnings and complete tax reports.

Applied to determine if the FLSA covers an employee. The test is that the employee either engages in interstate commerce or produces goods for such commerce.

Financial ratios and percentages reflecting averages for similar companies.

In a few limited cases, the unusual operating characteristics of an industry, usually based on risk, special accounting principles, and procedures, have been developed; these may not conform completely with GAAP for other industries.

Forms upon which an employer reports compensation paid to individuals who are not employees.

As distinguished from a bequest or devise, an inheritance is property acquired through laws of descent and distribution from a person who dies without leaving a will. Property so acquired takes as its basis, for gain or loss on later disposition or for depreciation, the fair market value of the property at the date of death of the decedent from whom it is acquired. An inheritance of property does not give rise to taxable income, but the income from an inheritance does. And if the inheritance is of income from property, such income is taxable.

The installment method of reporting income allows the profit on an installment sale to be taxed over the period that payments are received. The amount taxed in any year is equal to the payments received times the gross profit ratio (the total gross profit divided by the total contract price). However, the entire amount of any gain recaptured under Code Sec. 1245 or 1250 is reported in the year of sale regardless of whether any payment is received in that first year. Use of the installment method is mandatory unless the taxpayer elects not to report on the installment method.

Assets that lack a physical substance, such as goodwill, patents, copyrights, and computer software, although software has, in a sense, a physical attribute.

A trust created during the lifetime of the person setting up the trust.

The study of accounting principles used by different countries.

To understand and explain the meaning and importance of something (such as financial statements).

An individual who works in more than one state.

One not having a will; a person who dies without a will is said to die intestate.

A detailed list of articles of property. In the true accounting sense, and for income tax purposes, it refers only to a list of articles comprising stock in trade--articles held for sale to customers in the regular course of a trade or business. The cost of goods sold during the year is determined by adding to the inventory at the beginning of the year the purchases made during the year and subtracting from this sum the inventory at the close of the year.

A form used to list the volume and type of goods a firm has in stock.

The number of times inventory is purchased and sold during the accounting period (inventory turnover = cost of goods sold ÷ average inventory).

Study done by a consumer reporting agency on a job applicant or current employee concerning the individual's character, general reputation, and mode of living.

Transactions that involve the acquisition or disposal of long-term assets.

An involuntary conversion of property results when property is destroyed in whole or in part, stolen, seized, requisitioned or condemned (or where there is a threat or imminence of requisition or condemnation) and, as a result, the property is converted into money or other similar property, through insurance proceeds, condemnation awards, etc. The law has special provisions on involuntary conversion only where the conversion results in gain--that is, where the amount recovered exceeds the cost or other basis of the property converted. The law permits the nonrecognition of gain on such an involuntary conversion.

Certain expenses of a personal nature that are specifically allowed as deductions. Included in this group are: moving expenses, medical expenses, state and local income taxes, property taxes, mortgage interest, charitable contributions, personal casualty losses, and miscellaneous employee expenses.

See Surviving spouse.

Where property is held in the names of two or more persons with the title passing from the first joint tenant to die to the other joint tenant (or joint tenants) upon death.

An enterprise participated in by associates acting together, there being a community of interests and each associate having a right to participate in its control or management. For income tax purposes, a joint venture is treated in all respects as a partnership, not taxable in its own capacity, but regarded as a taxpayer for the purpose of computing its taxable income, which is distributable among the associates in the proportions agreed upon. Such distributive shares are reported by the associates on their individual income tax returns.

The record of original entry.

Transactions recorded in the accounting system of a business.

Recording transactions in a journal.

See Self-employed individual's retirement plan.

A key employee includes an officer of the employer earning more than a specified amount, any one of the 10 employees owning the largest interests in the employer, a 5 percent owner of the employer, or a 1 percent owner who is paid more than $170,000 per year.

A method of inventory costing that assumes that the most recently purchased merchandise is sold first.

The record of final entry.

A disposition of personal property by will.

Purchasing a business by acquiring the stock and obligating the business to pay the debt incurred.

Using borrowed funds to earn a profit greater than the interest that must be paid on the borrowing.

Debts or obligations of a business.

The U.S. Treasury Department, as part of its tax collection machinery, has a legal claim to the property of a taxpayer whose taxes are delinquent or overdue. Assessment of tax, demand, and refusal or neglect to pay control the creation and the effective date of the lien. Sometimes the lien will attach to property in the possession of a third-person transferee or fiduciary. Sometimes a creditor or other nontaxpayer, as well as the government, may assert a claim to the same property. The question of priorities must then be settled.

See Statute of Limitations.

Provides limited liability to the owners, who can elect to have the profits taxed at the LLC level or on their individual tax returns.

A partnership that provides limited liability for all partners.

A member of a partnership whose liability is limited to his or her investment in the partnership.

A partnership having one or more limited partners.

Termination of a business by distributing all assets and discontinuing the business.

Complete liquidation of a corporation is the winding up of its affairs by the settling of its accounts, the paying of all debts, the collecting of assets and the turning of the remainder over to the shareholders in exchange for their stock. Complete liquidation precedes dissolution of the corporation and is not entirely synonymous with it. A partial liquidation is a calling in of a part of the stock, with or without cessation of a part of the corporate activities. Special rules apply to the sale by a corporation of its assets as a step in liquidation, and to the treatment of liquidation distributions received by the shareholders.

Value of assets to be applied to preferred stock, usually par value or an amount in excess of par value, if the corporation is liquidated.

The ease with which an item can be converted into cash.

An established retail price.

Long-term capital gains and losses are gains and losses on the sale or exchange of capital assets that have been held for more than 12 months. A net long-term capital gain or loss is the excess of gains over losses, or vice versa. An excess of net long-term capital gains over net short-term capital losses is taxed as ordinary income to corporations.

Debts of a business that are due more than one year in the future.

The block of time, consisting of four quarters beginning July 1 of the second preceding year and ending June 30 of the prior year, used to determine if an employer is a monthly or a semiweekly depositor.

The disposition of an asset for less than its book value.

The principle by which inventory is reported at either its original cost or its replacement cost, whichever is lower.

Services designed to help clients improve their information systems or their business performance.

Accounting work carried on by an accountant employed by a single business in industry.

A business that sells goods that it has produced.

Price reduction below the original markon.

The interest rate a corporation is willing to pay and investors are willing to accept at the current time.

The price the business would pay to buy an item of inventory through usual channels in usual quantities.

The price per share at which stock is bought and sold.

The difference between the cost and the initial retail price of merchandise.

A price increase above the original markon.

The concept that revenues and the costs incurred in earning those revenues should be matched in the appropriate accounting periods.

In some cases where an accounting item is deemed too small to affect a user's decisions, the "required" accounting may be ignored.

The total amount (principal plus interest) payable when a note comes due.

A tax levied on employees and employers to provide medical care for the employee and the employee's spouse after each has reached age 65.

An informational entry in the general journal.

The stock of goods a merchandising business keeps on hand.

A business that sells goods purchased for resale.

A statutory merger (that is, one effected under the laws of the state) is a reorganization for income tax purposes, upon which no gain or loss is recognized under the conditions specified in the Code. A merger is the union of two or more corporations into one, the others giving up their existence and transferring all of their properties and liabilities to the one continuing corporation. It is distinguishable from a consolidation, which is the transfer of two or more corporations into a new corporation, the transferring corporations giving up their existence.

See experience rating.

See Experience rating system.

See Alternative minimum tax.

Stock ownership of 20 percent or less in a corporation which is at least 80 percent owned by another corporation.

A book in which accurate and complete records of all meetings of stockholders and directors are kept.

See Accelerated Cost Recovery System (ACRS)

It is assumed that only those items and events that can be measured in monetary terms are included in the financial statements. An inherent part of this assumption is that the monetary unit is stable. Thus, assets purchased one year may be combined in the accounts with those purchased in other years even though the dollars used in each year actually may have different purchasing power.

One who reported employment taxes of $50,000 or less for the four quarters in the lookback period.

A long-term debt created when a note is given as part of the purchase price for land or buildings.

If two or more persons who would otherwise be entitled to an exemption for a dependent together furnish more than one-half of a dependent's support, anyone who furnishes more than 10 percent of the support is entitled to the exemption if all the others who furnish more than 10 percent of the support file written declarations that they will not claim an exemption for the individual supported for that taxable year.

A type of income statement on which several subtotals are computed before the net income is calculated.

The characteristic of a partnership by which each partner is empowered to act as an agent for the partnership, binding the firm by his or her acts.

Those whose reserve accounts have been charged for more benefits paid out than contributions paid in to the fund.

For income tax purposes, there is a penalty of 5 percent of the underpayment if any part of an underpayment of tax is due to negligence or intentional disregard of rules and Regulations, but without intent to defraud. Negligence is a lack of the reasonable care and caution expected of a prudent person.

A financial instrument whose ownership can be transferred to another person or business.

A financial document containing a promise or order to pay that meets all requirements of the Uniform Commercial Code in order to be transferable to another party.

A net operating loss is limited substantially to a net loss incurred in the operation of a trade or business, although a casualty loss or a loss from a sale of a business asset is included within its scope. A net operating loss may be carried back two years against the income of those two years to the earliest year first. Any unused portion of such loss may be carried forward past the taxable year for 20 years.

The cost of an asset minus its accumulated depreciation, depletion, or amortization, also known as book value.

The result of an excess of revenue over expenses.

The worksheet line immediately following the column totals on which net income (or net loss) is recorded in two places: the Income Statement section and the Balance Sheet section.