Dictionary

A gain or loss is realized when a transaction is completed. However, not all realized gains and losses are taxed (recognized). A recognized gain or loss occurs when a taxpayer is obligated to pay tax on a completed transaction.

A recapitalization is an internal reorganization--that is, a rearrangement of the capital structure of a corporation by changing the kind of stock or the number of shares outstanding or by issuing stock instead of bonds, or vice versa. As distinguished from most other types of reorganization, a recapitalization involves only one corporation and is usually accomplished by the surrender by shareholders or bondholders of their securities for stocks or securities of a different type.

A form showing quantity and condition of goods received.

Arrangement entered into by two or more states whereby the resident of one state working in another state will not be subject to the withholding of income taxes by the state in which the person is employed if that state has entered into a similar agreement with the employee's resident state.

Agreements between states to provide unemployment insurance coverage and payment of benefits to interstate workers.

The date on which the specific stockholders to receive a dividend are determined.

Test for possible impairment that compares the asset's net book value with the estimated net cash flows from future use of the asset.

A buying back, or a repurchase. A redemption of stock is its repurchase from the stockholder by the corporation which issued it (whether or not it had originally been issued to the stockholder from whom it is repurchased). A bona fide redemption of stock is treated as a sale or exchange of the stock and, in the case of a taxpayer other than a dealer in securities, gain or loss on the redemption is a capital gain or loss.

Document used by the employer to investigate the references given on the application blank by the job applicant.

See Credits or refunds.

Bonds issued to a party whose name is listed in the corporation's records.

A person or institution in charge of the issuance and transfer of a corporation's stock.

The Commissioner publishes interpretations of the law in the form of Regulations. They do not have the foce and effect of law; however, in those cases in which the law on a particular subject calls for rules on that subject to be expounded though Regulations, the courts afford them great weight. Provisions of the Regulations on a particular subject are disapproved by the courts in some rare instances, and in a few cases the weight of authority has resulted in the Commissioner's amending them.

The Code does not allow a loss, except in the case of a distribution in liquidation of a corporation, from the sale or exchange of property between related persons. A similar rule bars a deduction for expenses and interest incurred in transactions between related persons when the payer is on the accrual-basis method of accounting and the payee is on the cash-basis method. The following parties are considered related persons for purposes of these rules: (1) members of the same immediate family, except for transfers between spouses or incident to divorce; (2) an individual and a corporation in which the individual owns more than 50 percent of the outstanding stock (directly or indirectly); (3) two members of a controlled corporate group; (4) a trust fiduciary and a corporation of which more than 50 percent of the outstanding stock is owned by the trust or the grantor of the trust; (5) a grantor and fiduciary of any trust; (6) a fiduciary of one trust and a fiduciary of another trust if the same person is the grantor of both trusts; (7) a fiduciary of a trust and any beneficiary of such trust; (8) a fiduciary of a trust and a beneficiary of another trust if the same person is the grantor of the trusts; (9) a person and an exempt charitable organization controlled by that person; (10) a corporation and a partnership if the same person owns more than 50 percent of the interest in the partnership; (11) two S corporations if the same person owns more than 50 percent of the outstanding stock of each corporation; or (12) an S corporation and a C corporation if the same person owns more than 50 percent of the outstanding stock of each corporation.

A reorganization occurs when a business undergoes a new capital arrangement, with or without new administration. If only one corporation is involved, it is a recapitalization. In income tax law, the term applies only to corporations. The Code contains provisions for nonrecognition of gain or loss on exchanges made in pursuance of a reorganization and the shareholders of the corporations involved exchange their shares or receive distributions without surrender of their shares. The provisions of the Code must be strictly complied with in order for such exchanges or distributions to be nontaxable.

Repairs are expenditures made to keep property in good condition, but not basically intended to appreciably prolong the life or increase the value of the property. If the property is business or income-producing property, the amount of ordinary and necessary repairs is deductible.

See Market price.

Expenditures for making good or whole a portion of property which has deteriorated through use or been destroyed through accident. Although deduction for the gradual deterioration or the destruction is allowable, subject to the limitations in the Code, a replacement is a capital expenditure to be distinguished from repairs.

A balance sheet that lists the asset accounts first, followed by liabilities and owner's equity.

Document submitted by a department head to the Human Resources Department asking for additional or replacement employees.

Experience-rating plan used in most states, based on: Contributions - Benefits Paid / Average Payroll.

That portion of the estate which remains after the payment of debts, expenses of administration, legacies and devises. It consists of that part of the estate which has not been legally disposed of by the will prior to the carrying out of the residuary clause of said will.

The estimate of the amount that could be obtained from the sale or disposition of an asset at the end of its useful life; also called salvage or scrap value.

A signature that transfers a check to a specific party for a stated purpose.

A business that sells directly to individual consumers.

A method of estimating inventory cost by applying the ratio of cost to selling price in the current accounting period to the retail price of the inventory.

The cumulative profits and losses of the corporation not distributed as dividends.

See Tax credit for the elderly.

A measure of how well the corporation is making a profit for its shareholders; the ratio of net income available for common stockholders to common stockholders' equity.

An inflow of money or other assets that results from the sales of goods or services or from the use of money or property; also called income.

Revenue is recognized when it has been earned and realized.

Journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses to avoid problems in recording future payments or receipts of cash in a new accounting period.

An S corporation, as distinguished from a C corporation (the treatment of whose distributions is governed by Subchapter C), is a small business corporation that meets various requirements and has validly elected not to be taxed at the corporate level. Items of income or loss are passed through to shareholders in much the same manner that such items are passed through to the partner of a partnership.

Rule that determines if an employer has satisfied the deposit obligations by (a) having no shortfall (under deposit) that exceeds the greater of $100 or 2 percent of the amount of employment taxes required to be deposited and (b) having deposited the shortfall on or before the shortfall make-up date.

Remuneration paid on a monthly, biweekly, semimonthly, or yearly basis.

A method of paying employees according to an agreed-upon amount for each week or month.

A contra revenue account where early payment discounts are recorded.

A contra revenue account where sales returns and sales allowances are recorded; see definitions of sales return and sales allowance.

A reduction in the price originally charged to customers for goods or services.

A cash discount offered by the supplier for payment within a specified period.

A supplier's billing document.

A firm's acceptance of a return of goods from a customer.

An estimate of the amount that could be received by selling or disposing of an asset at the end of its useful life.

A list of all balances owed to creditors.

A listing of all balances of the accounts in the accounts receivable subsidiary ledger.

A schedule that supplements the income statement, showing the selling and general and administrative expenses in greater detail.

See Residual value.

If, during the taxable year, the recognized gains on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion of property used in the trade or business or of capital assets held long-term into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, then such gains and losses are treated as capital gains and losses. If such gains do not exceed such losses, then the gains and losses are treated as ordinary gains and losses. However, to the extent that any Section 1231 gain contains gain from the disposition of Section 1245 or Section 1250 property, such gain will be recaptured as ordinary income to the extent of certain depreciation deductions taken.

See Small business stock.

Section 1245 property includes decreciable personal property and other depreciable property (other than buildings or their structural components) used in manufacturing, production, or extraction or used in furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services. When Section 1245 property is disposed of, any gain is treated as ordinary income to the extent of depreciation deducted. Thus, although Section 1245 property may also be a Section 1231 asset, Section 1231 gain will be realized on the disposition only to the extent that the gain realized exceeds the post-1961 depreciation. Single-purpose agricultural and horticultural structures and storage facilities used in connection with the distribution of petroleum and its primary products that are placed in service after 1980 are included in the Section 1245 property category. Such property placed in service before 1981 is Section 1250 property. A gain on the sale or disposition of Section 1245 property is taxed as ordinary income to the extent of the depreciation deductions allowed.

Section 1250 property is property that is depreciable or recoverable but is not subject to the recapture rule under Code Sec. 1245. This includes all intangible real property (such as leases of land, buildings and their structural components, including elevators and escalators placed in service after 1986) and all other tangible real property except property which is used as an integral part of manufacturing, production or extraction or used in furnishing transportation, communications, electrical energy, gas, water or sewage disposal services, or research or storage facilities used in connection with these activities.

Section 306 is designed to prevent preferred stock bail-outs where preferred stock (Section 306 stock) is issued as a dividend and either sold or redeemed in an attempt to realize capital gains. Section 306 accomplishes this by taxing the gain on sale or receipts from redemption as ordinary income to the extent of the corporation's accumulated earnings and profits.

Bonds for which property is pledged to secure the claims of bondholders.

Self-employed individual's retirement plans--or, as they are more commonly called, H.R. 10 plans or Keogh plans--are qualified retirement plans that must meet certain special requirements because they benefit owner-employees. The annual limit for a participant in a defined contribution plan for 2016 is the lesser of $53,000 or 100 percent of compensation. With respect to a participant in a defined benefit plan, the maximum benefit is the lesser of $210,000 for 2016 (indexed each year) or average compensation for the participant's three years of highest compensation.

The net earnings derived by individuals from a business or profession carried on as a sole proprietorship or as a partnership.

Twice a month.

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

This is the concept that a business is separate from its owner or owners and the financial statements reflect the affairs of the business, not those of the owner.

Report that provides a wage and employment record of the separated employee and the reason for leaving.

Bonds issued at one time but payable over a period of years.

A business that sells services.

A fee charged by a bank to cover the costs of maintaining accounts and providing services.

A person who owns shares of stock in a corporation; also called a stockholder.

A short sale, as applied to securities, is an agreement to transfer stock that the seller does not own or whose stock certificates are not in the seller's control but must be borrowed to cover the transaction. The borrowed stock must be replaced within a specified time through purchase on the market and transferred to the lender of the borrowed stock. For income tax purposes, there is no gain or loss on the transactions until the short sale is covered by purchase and transfer. Special rules apply for determining whether gain or loss on a short sale is a long-term or short-term capital gain or loss.

See Holding period.

The excess of the amount of employment taxes required to be deposited over the amount deposited on or before the last date prescribed for the deposit.

Any payment made to individuals because of their personal injury or sickness that does not constitute wages.

A commercial draft that is payable on presentation.

A simple trust is one for which the trust instrument requires that all income be distributed currently, with no authority to make charitable contributions. Also, the trust is a simple trust only for a year in which it distributes current income and makes no other distributions to beneficiaries. A simple trust is entitled to a $300 deduction in lieu of a personal exemption. For a year in which the trust does not meet these requirements, it is a complex trust.

A type of income statement where only one computation is needed to determine the net income (total revenue — total expenses = net income).

An accounting error involving a misplaced decimal point.

A small business corporation is defined in the Code for two separate purposes. For the two definitions, see S corporation and Small business stock.

A small business investment company is a term which, for federal income tax purposes, is restrictred to a company operating under the Small Business Investment Act of 1958, that is, a company authorized by that Act to provide equity capital to small business concerns through the purchase of convertible debentures. These companies and their investors are given special income tax advantages, such as a 100 percent dividends-received credit and ordinary loss deductions for the worthlessness of stock or securities held by the investment company or stock issued by the company.

To encourage the flow of new funds into small business, Congress created a stock classification with a special tax treatment. This is Section 1244 stock. Under Code Sec. 1244, an original individual investor can treat a loss on small business corporation stock as an ordinary loss--up to $50,000 on a single return or $100,000 on a joint return. Because the Code Sec. 1244 loss is considered in any net operating loss computation, the carryback and carryover rules apply. To qualify under Code Sec. 1244, the stock must be common stock in a domestic small business corporation.

To encourage investment in small businesses, the PATH Act of 2015 extends permanently 100 percent exclusion of the profit, up to $10 million, made on the sale or exchange of stock of qualified small businesses. The stock must be held for more than five years by a non-corporate investor.

Employers with fewer than 50 full-time equivalent employees with average annual wages of less than $50,000.

A federal act providing certain benefits for employees and their families; officially the Federal Insurance Contributions Act.

A nonprofit organization, such as a city, public school, or public hospital.

A tax imposed by the Federal Insurance Contributions Act and collected on employee earnings to provide retirement and disability benefits.

A business entity owned by one person who is legally responsible for the debts and taxes of the business.

Allowance claimed by employees so that wages which are below the level subject to the income tax will not be subject to withholding.

A method of inventory costing based on the actual cost of each item of merchandise.

A distribution by a corporation of stock or securities in another corporation controlled by it (through at least 80 percent stock ownership) without the surrender of any shares by the shareholders. It is a type of corporate separation. The distribution need not be in reorganization. However, the law contains definite rules requiring that the controlled corporation must have been actively engaged in a trade or business and must continue to be so engaged after the distribution. Furthermore, the trade or business must have been conducted (but not necessarily by the controlled corporation) for at least five years prior to the distribution. The distribution will not be taxable to the shareholders if the distributing corporation distributes at least 80 percent of the outstanding stock of the controlled corporation.

A type of corporate separation, not necessarily in reorganization, whereby a parent corporation distributes to its shareholder stock in a corporation which it controls, under the same conditions as in a spin-off, except that the shareholders surrender a part of the stock in the parent corporation for the stock in the controlled corporation. As under the conditions described under spin-off, no gain is recognized to the shareholders from the exchange of their shares.

A split-up occurs where a corporation transfers its assets to two or more corporations in exchange for their stock or securities and then completely liquidates by distributing the stock in the new corporations to its stockholders or security holders in exchange for its own stock. The same nonrecognition treatment applies as in the case of a spin-off or a split-off.

Taxpayers receive the benefit of a minimum amount of itemized deductions called the standard deduction. The standard deduction is a fixed amount that is used to simplify the computation of the tax liability. It is also designed to eliminate lower-income individuals from the tax rolls. All taxpayers subtract from adjusted gross income the larger of their itemized deductions or the standard deduction. The standard deduction is based on the filing status of the taxpayer and is made up of the basic standard deduction plus any additional standard deduction. The standard deduction amounts are adjusted annually for inflation.

An additional standard deduction is allowed aged or blind taxpayers. For 2016, the additional standard deduction is $1,250 for an aged or blind individual who is married or is a surviving spouse; the additional standard deduction is $1,550 for a single individual or for a head of household who is aged or blind. Taxpayers receive an additional standard deduction for being both aged and blind. Thus, a married couple, both aged and blind, receives and additional standard deduction of $5,000 ($1,250 x 4).

Taxes levied by a state government against employers to benefit unemployed workers.

The value that can be assigned to no-par-value stock by a board of directors for accounting purposes.

A form sent to a firm's customers showing transactions during the month and the balance owed.

A financial statement that provides information about the cash receipts and cash payments of a business.

A formal report of changes that occurred in the owner's financial interest during a reporting period.

A financial statement prepared to summarize the changes in partners' capital accounts during an accounting period.

A financial statement that shows all changes that have occurred in retained earnings during the period.

A financial statement that provides an analysis reconciling the beginning and ending balance of each of the stockholders' equity accounts.

Accounting principles established by the Financial Accounting Standards Board.

Initial statement filed by new employers with their state unemployment office, which determines their liability to make contributions into the state unemployment compensation fund.

A statute of limitations sets out the period within which actions may be brought upon claims or within which rights may be enforced. The limitations periods of greatest importance for tax purposes are the three-year period in which a tax deficiency may be assessed (subject to modifications and extensions) and the three-year period in which a taxpayer may claim a refund (also subject to modifications).

A higher basis than an asset had in the hands of a previous owner. Under present law, this is accomplished through a transfer on which the gain is taxable or through acquisitions (not subject to the carryover basis rules) from a decedent.

Certificates that represent ownership of a corporation.

A stock bonus plan is established and maintained to provide benefits similar to those of a profit-sharing plan, but the contributions are not necessarily dependent upon profits and the benefits are distributable in the stock of the employer. A stock bonus plan is often referred to as an employee stock ownership plan (ESOP) or an employee stock ownership trust.

The form by which capital stock is issued; the certificate indicates the name of the corporation, the name of the stockholder to whom the certificate was issued, the class of stock, and the number of shares.