Dictionary

Distribution of the corporation's own stock on a pro rata basis that results in conversion of a portion of the firm's retained earnings to permanent capital.

See Employee stock option.

When a corporation issues two or more shares of new stock to replace each share outstanding without making any changes in the capital accounts.

The owners of a corporation; also called shareholders.

Stockholders in whose name shares are held on date of record and who will receive a declared dividend.

The corporate equivalent of owners' equity; also called shareholders' equity.

See Capital stock ledger.

A taxpayer may elect, under MACRS, to claim straight-line MACRS deductions instead of the regular MACRS allowance. The recovery periods under the straight-line election include the regular recovery period and longer recovery periods. The straight-line MACRS deductions are computed in much the same manner as the deductions under the general rules, except that salvage value is not taken into account.

Amortizing the premium or discount on bonds payable in equal amounts over the life of the bond.

Allocation of an asset's cost in equal amounts to each accounting period of the asset's useful life.

An entity formed as a corporation that meets the requirements of Subchapter S of the Internal Revenue Code to be treated essentially as a partnership, so that the corporation pays no income tax.

A subsidiary ledger that contains an account receivable for each stock subscriber.

A list of the stock subscriptions received.

See Parent corporation.

A ledger dedicated to accounts of a single type and showing details to support a general ledger account.

Individuals should arrange their financial transactions in a manner that will minimize their tax liability. If a transaction is all it purports to be and not merely a transaction to avoid taxes, then it is valid. If the transaction is solely to avoid taxes and there is no business purpose to the transaction, then it is invalid. The fact that a taxpayer uses one form of transaction rather than another to minimize taxes does not invalidate the transaction. A good example of when substance v. form is a significant issue is in the area of leases. Payments under a lease are tax deductible. Payments under a purchase agreement are not tax deductible. Therefore, it is of utmost importance to determine the true "substance" of this type of transaction. Questions to be asked might include: Do any equity rights transfer to the lessee at the end of the lease period? May the lessee buy the property at a nominal purchase price? With a lease transaction it is immaterial that the parties refer to the transaction as a lease. The true substance of the transaction controls over the form.

The basis for gain or loss on sale or for depreciation of a property may, under certain conditions, be determined by reference to the basis of a prior owner of the property (as in the case of a gift) or by reference to the basis of other property (as in the case of a tax-free exchange). Both are defined in the Code as a substituted basis, although the former is sometimes referred to as a transferred basis.

A method of depreciating asset costs by allocating as expense each year a fractional part of the asset's depreciable cost, based on the sum of the digits of the number of years in the asset's useful life.

Additional compensation such as vacation pay, bonuses, and commissions paid to employees.

Surviving spouses are entitled to the income-splitting benefits of filing a joint return on the death of one spouse. The joint return is made for the regular tax year of the survivor and the short period of the decedent. Use of joint return rates is also allowed to an unmarried widow or widower who maintains a home as a household for a dependent child. This benefit is limited to the first two tax years following the year in which the decedent spouse died.

A type of account, resembling a T, used to analyze the effects of a business transaction.

Assets such as machinery, equipment, furniture, and fixtures that can be removed and used elsewhere.

A service that involves tax compliance and tax planning.

A recovery is includible in income only to the extent that the deduction reduced tax in any prior year by any amount. Therefore, where a deduction reduced taxable income but did not reduce tax, the recovery amount is excludable from income. This rule applies to both corporate and noncorporate taxpayers.

The United States Tax Court is a legislative court under Article I, Section 8, Clause 9 of the Constitution. Its principal function is to review deficiencies assessed by the Commissioner for income, estate, gift, or certain excise taxes. Hearings are held in principal cities throughout the country.

The tax credit for the elderly and the permanently and totally disabled replaced the old retirement income credit. One set of rules for credit purposes applies to individuals who are age 65 or older. Another set of rules applies to federal, state, and local government retirees who are under age 65 and to permanently disabled individuals.

See Employee Stock Ownership Plan (ESOP).

Basically, tax shelters are investments that provide investors with the possibility of reducing their current income taxes through methods sanctioned by the tax law, thereby sheltering current income from tax. Although tax shelters offer an investor the opportunity to invest in many different kinds of assets and, thus, offer a wide range of potential benefits to their investors, the following basic aims are common to the vast majority of tax shelters: (1) maximizing the tax incentives available to the investors; (2) reducing current income tax liability and deferring taxation on any income or gain from the investment until some future tax year; and (3) permitting investors to use borrowed money to finance their original investments (leveraging). Some tax shelters satisfy all three aims, while other satisfy one or two; some rely heavily on their ability to satisfy only one of the aims.

Earnings in excess of the base amount set by the Social Security Act.

Taxable income for a corporation is gross income minus all deductions allowable, including special deductions such as the one for dividends received. Taxable income for individuals who itemize deductions is equal to adjusted gross income minus personal exemptions, minus the greater of the itemized deductions or the standard deduction amount. For nonitemizers, taxable income is adjusted gross income minus personal exemptions minus the standard deduction.

The maximum amount of wages during a calendar year that is subject to a particular tax, such as FICA.

The calendar year or a fiscal year ending during such calendar year upon the basis of which the taxable income is computed. In the case of a return made for a fractional part of the year, taxable year is the period for which such return is made.

An account whose balance is transferred to another account at the end of an accounting period.

Generally speaking, this is a joint tenancy between husband and wife. A tenancy by the entirety cannot be terminated except by the joint action of the husband and wife during their lives. This is in contrast to a joint tenancy, which either party may terminate merely by conveying the interest to another party.

A form of ownership where title is held by two or more persons with each owning a fractional interest in the undivided property. Upon the death of one tenant in common, the interest will not pass to the surviving tenant in common but will become part of the deceased tenant's probate estate and will be distributed according to such tenant's will.

A trust set up under the will of the decedent.

One who makes or has made a will; one who dies leaving a will.

Rate of pay for an employee's work in excess of 40 hours a week.

Form on which employee's time worked is recorded manually by the worker or automatically by a time clock.

A commercial draft that is payable during a specified period of time.

Form that indicates an employee's time of arrival and time of departure.

Gift or gratuity given by a customer in recognition of service performed for him or her.

One engaged in an occupation in which tips of more than $30 a month are customarily and regularly received.

Funds borrowed from the federal government by states who, due to financial difficulties, cannot pay their unemployment compensation benefits.

Top-heavy plan refers to a qualified plan that must meet additional requirements because key employees' aggregate accumulated benefits or aggregate accounts exceed 60 percent of all such accumulated benefits or accounts in the plan.

The sum of a corporation's liabilities and stockholders' equity.

A trust created by the deposit of a person's own money in his or her own name as trustee for another person. This is considered a revocable trust at the will of the trustee until the depositor dies or otherwise completes the gift during his or her lifetime.

A form of commercial time draft used in transactions involving the sale of goods.

A reduction from list price.

An intangible asset; an exclusive business name registered with the U.S. Patent Office; also called brand name.

A trade or business consists of any activity that occupies the time, attention, and labor of individuals for the purpose of earning a livelihood or making a profit. It includes the rendering of services to others as an employee for compensation, the carrying on of a profession, and every business occupation carried on for subsistence or profit and into which the elements of bargain and sale, barter, exchange, or traffic enter.

An intangible asset; an exclusive business symbol registered with the U.S. Patent Office.

See Leveraging.

A broad meaning is accorded the phrase transaction entered into for profit, losses from which are deductible. It includes the acquisition of any income-producing property or investment property, as distinguished from property for one's personal use or enjoyment. The acquisition may be by gift or inheritance if the property is investment or income-producing property. In some cases, the term can include a transaction entered into simply to avoid or cut down a loss on another transaction.

A person or institution that handles all stock transfers and transfer records for a corporation.

If a taxpayer transfers assets to another at a time when the taxpayer is liable for outstanding income, estate, or gift taxes (whether or not determined) and the remaining assets after the transfer are insufficient to pay such taxes, the person who received the assets is liable for the taxes to the extent of the value of the assets received. If there are two or more transferees, each one is so liable.

Preprinted government form submitted with Forms W-2 to the Social Security Administration.

The transparency notion is that information provided in the financial statements and the notes accompanying them should provide a clear and accurate picture of the financial affairs of the company. The key to this idea is that of disclosure.

See Freight in account.

An accounting error involving misplaced digits in a number.

Travel expenses are deductible in determining adjusted gross income in the case of an individual involved in a trade or business or in a transaction entered into for profit. Travel expenses include transportation costs and the amount spent for meals and lodging while away from home in the pursuit of a trade or business. However, the 2 percent of adjusted gross income floor applies to unreimbursed travel expenses of employees and the 50 percent limitation applies to meal and entertainment expenses without regard to whether the taxpayer is traveling.

A corporation's own capital stock that has been issued and reacquired; the stock must have been previously paid in full and issued to a stockholder.

Comparing selected ratios and percentages over a period of time.

A statement to test the accuracy of total debits and credits after transactions have been recorded.

A fiduciary relationship with respect to property whereby the property is held by one party (the trustee) for the benefit of another party (the beneficiary). A trust is usually set up and governed by a written document.

Income received before it is earned.

A program that provides unemployment compensation through a tax levied on employers.

See Units-of-production method.

A method of depreciating asset cost at the same rate for each unit produced during each period.

The implication that a creditor can look to all partners' personal assets as well as the assets of the partnership for payment of the firm's debts.

The amounts entered in the Adjusted Trial Balance section of the worksheet.

An account, such as Allowance for Doubtful Accounts, whose balance is revalued or reappraised in light of reasonable expectations.

Computing the relationship between each item on a financial statement to some base amount on the statement.

The process of conveying to employees the right to share in a retirement fund in the event they are terminated before the normal retirement age.

Payments deliberately made by employers to their state funds in order to qualify for a lower unemployment compensation tax rate.

Remuneration paid on an hourly, weekly, or piece-work basis.

Preprinted government form that contains information about an employee's earnings and tax withholdings for the year.

Statements furnished by employers to their employees informing them of the wages paid during the calendar year and the amount of taxes withheld from those wages.

Statements filed by the employer, usually with the quarterly contribution report, which lists employee names, social security numbers, taxable wages, taxable tips, state in which worker was employed during the reported quarter, and employer's federal account number.

A term that refers to situations when employers do not pay employees in accordance with statutory or contract requirements.

Method of determining amount of income taxes to be withheld by reading amount from tables provided by the IRS, which take into consideration length of payroll period, gross earnings, marital status, and number of withholding allowances claimed.

Remuneration or compensation of paid employees.

In the language of the stock exchange, a wash sale is the simultaneous purchase and sale of the same stock. For income tax purposes, a sale of stock or securities at a loss cannot result in deduction of the loss if substantially identical stocks or securities are purchased within a 61-day period beginning 30 days before the date of the sale and ending 30 days after the sale. The acquisition or reacquisition of such stock or securities has no effect on sales at a gain.

See Average cost method.

The concept that the taxpayer should be taxed on a transaction when he or she has the means to pay the tax. For example, a taxpayer owns property that is increasing in value. The IRS does not tax the increased value until the taxpayer sells the property. At the time of sale, the taxpayer has the wherewithal to pay.

A business that manufactures goods for or distributes goods to retail businesses or large consumers such as hotels and hospitals.

Funds taken from the business by the owner for personal use.

Since the graduated withholding system could cause taxpayers who have large itemized deductions to be seriously overwithheld, these taxpayers are permitted to claim extra exemptions which are called withholding allowances.

An employer is required to withhold income taxes from the wages of employees. The tax to be withheld is computed under the percentage method or by use of wage-bracket tables. There is also withholding of tax at source in the case of nonresident aliens receiving fixed or determinable annual or periodic income from United States sources.

See Wage and Tax Statement, Form W-2.

Insurance that protects employees against losses from job-related injuries or illnesses, or compensates their families if death occurs in the course of the employment.

The difference between current assets and current liabilities. It is a measure of the firm's ability to pay current obligations.

A form used to gather all data needed at the end of an accounting period to prepare financial statements.

Fixed and regularly recurring period of 168 hours - 7 consecutive 24-hour periods.