Learn about meanings of common words in tax and accounting industry. This glossary include definitions of tax and accounting terms used very often.
Rental property related tax terms.
Direct expenses – expenses that benefit only the business part of the home and are fully deductible.
Dwelling unit – a property that provides basic living accommodations (i.e., sleeping space, a toilet, and cooking facilities).
Indirect expenses – expenses incurred in maintaining and running the entire home.
Listed property – a tangible property that is split between personal and business use.
Principal place of business – the most important or significant place for the business.
Minimal rental – a property that has fewer than 15 rental use days in a year.
Minimum use tests – examine the number of days and percentage of time for which the property was used for rental and personal use to determine how lessors treat rental income and expenses.
Passive activity loss (PAL) limitations – prevent passive losses from being applied against nonpassive income.
Personal use day – includes (1) any day the owner or any other person who has an interest in the unit uses the property, (2) days swapped for use of another property, or (3) days property is rented below fair market value.
Personal use test – the second minimum use test, which examines the number of personal use days, defined as days the property was used by the owner (or any other person who has an interest in the unit).
Related party – a brother, sister, spouse, ancestor, or lineal descendant of the taxpayer or any person who has an interest in the unit.
Rental use day – generally any day the property is rented to a third party at fair rental value.
Rental use test – the first minimum use test, which examines the number of rental use days, defined as days the property was rented to unrelated third parties at fair rental value.
Vacation home – property that passes the minimum rental use test but fails the minimum personal use test. Rental deductions may not exceed gross income derived from rental activities for vacation homes.
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Common terms used in business tax and accounting.
Business – activity for which the primary purpose for engaging in the activity is for income or profit.
Common law employees – workers for a payor if the payor controls what will be done and how it will be done. This applies even when the payor gives the employee freedom of action. What matters is that the payor has the right to control the details of how the services are performed.
Disregarded entity – a domestic single-member LLC that is not treated as a separate entity for tax purposes.
Independent contractor – worker for a payor if the payor has the right to control or direct only the result of the work and not what will be done and how it will be done.
Qualified joint venture – an unincorporated business owned by a married couple if (1) the only members of the joint venture are the spouses, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.
Statutory employee – a worker who straddles the divide between being self-employed and being considered a regular employee. A statutory employee is a person who is in business for himself or herself, but who works primarily or wholly for a specific company.
Statutory nonemployees – may qualify as employees under the common law test but are nevertheless treated under the Internal Revenue Code as independent contractors for federal income tax withholding and Social Security, Medicare, and FUTA tax purposes.
Tax gap – the difference between a taxpayer’s self-reported tax liability and his or her correct tax liability.
Employee-owners – own a share of and provide services to an S corporation.
Definitions of Pass Through Entity Taxation
Qualified business income – items of income, gain, deduction, and loss to the extent such items are effectively connected with the conduct of a trade or business within the United States.
Qualified business income deduction (QBID) – for small businesses, a deduction allowed by Congress in response to the reduction in the maximum corporate tax rate. QBID is generally equal to 20% of QBI.
Reasonable compensation – the amount of wages or salary for like services provided in a similar situation, which would stand up to challenge by the IRS.
Qualified trades or business (QTB) – any trade or business other than a C corporation, a specified service trade or business, or the trade or business of performing services as an employee.
Self-employment tax – a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves.
Specified service trade or business (SSTB) – include any trade or business that involves the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and trades or businesses where the principal asset is the reputation or skill of 1 or more of their employees or owners. Specifically excluded are architects, engineers, real estate agents and brokers, and insurance agents and brokers.
Business interest limitation – the amount allowed as a deduction for any taxable year for business interest is the sum of (1) the taxpayer’s business interest income and (2) 30% of the taxpayer’s adjusted taxable income, plus (3) the taxpayer’s floor plan financing interest.
Following words are used in individual tax.
Capital gain property – property on which a long-term capital gain would be recognized if it were sold.
Estate tax – an excise tax imposed on the transfer of the taxable estate of every decedent who was a U.S. citizen or resident.
Excess business loss – the excess of aggregate deductions over the sum of aggregate gross income or gain attributable to trades or businesses of the taxpayer plus a threshold amount.
Federally declared disaster – a disaster that occurred in an area declared by the President of the United States to warrant assistance by the federal government under the Stafford Disaster Relief and Emergency Assistance Act.
Floor plan financing – indebtedness used to finance the acquisition of motor vehicles held for sale or lease and secured by the inventory acquired.
Ordinary income property – property on which ordinary income or a short-term capital gain would be recognized if it were sold.
Qualified business income (QBI) – the net amount of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.
Qualified business income deduction (QBID) – a below-the-line deduction intended to reduce the tax rate on qualified business income to a rate that is closer to the corporate tax rate of 21%.
Qualifying child – the taxpayer’s child, stepchild, sibling, stepsibling, or a descendant of any of these, or an eligible foster child (1) who is a U.S. citizen or resident alien, (2) for whom the taxpayer may claim a dependency exemption, and (3) who is less than 17 years old as of the close of the tax year.
Remuneration – generally refers to wages and includes amounts specifically required to be in income.
Standard deduction – the sum of the basic standard deduction and any applicable additional standard deduction amounts.
Unified credit – a tax credit which offsets the estate tax liability that would be imposed on a taxable estate.
Corporate tax and accounting terms.
Accumulated adjustments account (AAA) – the current cumulative balance of all the separately stated items and non-separately stated ordinary items of the S corporation.
At-risk rules – limit the amount of loss allowable as a deduction to the amount a person has at risk in the activity from which the loss arose.
Built-in gains (BIG) tax – tax imposed on an S corporation upon the sale of assets within the 5 year recognition period upon conversion from C to S status that have inherent (built-in) appreciation.
Distribution – sum of any money plus the fair market value (FMV) of property distributed.
Ineligible corporations – financial institutions, such as banks, that use the allowance method of accounting, and insurance companies.
Net passive income (NPI) – PII reduced by expenses directly attributable to its production.
One class of stock – outstanding shares of the corporation must be identical as to the rights of the holders in the profits and in the assets of the corporation. Variation in voting rights of that one class of stock is permitted.
Original stock basis – cost of acquisition or basis of contributed property.
Other adjustments account (OAA) – cumulative balance of tax-exempt income, reduced by expenses incurred in earning it.
Passive activity limitations – require losses from passive activities to be applied against and are limited to gains from passive activities.
Passive investment income (PII) – gross receipts from dividends, interest, royalties, rents, and annuities, reduced by interest on accounts receivable (notes) for inventory sold in the ordinary course of trade or business, and rents from a lease under which significant services are rendered to the lessee (those not customarily rendered) that are sufficient to create active income.
Passive investment income termination – occurs when, for 3 consecutive tax years, the corporation has both Subchapter C E&P on the last day and PII that is greater than 25% of gross receipts.
Qualified business income (QBI) – refers to items of income, gain, deduction, and loss to the extent such items are effectively connected with the conduct of a trade or business within the United States and included or allowed in determining taxable income for the taxable year.
Qualified plans – plans that treat all employees uniformly and do not give preferential treatment to key employees.
S Corporation tax and accounting terms.
Qualified Subchapter S Subsidiaries (QSSS) – an electing domestic corporation that qualifies as an S corporation and is 100% owned by an S corporation parent. The Internal Revenue Service (IRS) refers to a QSSS as a QSub.
Recognition period – the amount of time elapsed beginning on the date the S election became effective and ending on the sale or transfer date. For S elections made after 2010, the BIG tax will apply to asset sales when the recognition period is less than 5 years.
Separately stated items – S corporation items of income, deduction, and credit, which could alter the tax liability of shareholders if taken into account by them on their personal returns.
Accumulated earnings credit (AEC) – not a credit, but a deduction to arrive at ATI.
Accumulated earnings tax (AET) – a 20% penalty tax imposed only on a corporation that, for the purpose of avoiding income tax at the shareholder level, allows earnings and profits to accumulate instead of paying them to shareholders as dividend distributions.
Accumulated taxable income (ATI) – a measure of the corporation’s ability to distribute dividends from current-year earnings. ATI is taxable income after adjustments.
Adjusted income from rents (AIR) – rental income net of property taxes, interest, depreciation, and rent paid.
Adjusted ordinary gross income (AOGI) – OGI reduced by certain reductions, such as those allowed against rental and royalty income.
Affiliated group – each corporation in a chain of corporations meeting certain ownership conditions.
Consolidated return – a single federal income tax return that may be filed by two or more includible corporations that are members of an affiliated group.
Controlled group – a group of corporations with a specified degree of relationship by stock ownership.
Dividends-received deduction (DRD) – deductions for dividends received from corporations outside the consolidating group.
Foreign Tax Credit (FTC) – a credit applied against gross tax liability after nonrefundable personal credits and before all other credits for taxes paid to other countries or U.S. possessions.
Intercompany transaction – a transaction between corporations that are members of the same consolidated group.
Ordinary gross income (OGI) – gross income for regular tax adjusted for property disposition transactions.
Personal holding company (PHC) tax – a 20% penalty tax imposed on undistributed personal holding company income.
Personal holding company income (PHCI) – a generally passive type income that includes interest, dividends, royalties, rental income, personal services income, and distributions from estates or trusts.
Personal service corporation (PSC) – a corporation where the principle activity is performing personal services, substantially by employee-owners. The PSC is taxed at a flat rate of 21% on all taxable income.
Qualified foreign taxes (QFTs) – include foreign taxes on income, war profits, and excess profits, together with taxes in lieu of these three taxes.
Undistributed personal holding company income (UPHCI) – taxable income, net of specific adjustments and minus the DPD.
Tax penalty related words and their definitions.
30-day letter – a letter sent to the taxpayer stating an IRS examiner’s proposal of an additional tax amount resulting from computerized examination or audit of a return.
Deficiency – any excess of tax imposed over the sum of amounts shown on the tax return plus amounts previously assessed (reduced by rebates).
Guaranteed installment agreement – under certain conditions, an arrangement for a taxpayer to pay taxes owed in installments that the IRS will automatically agree to.
Jeopardy levy – when the collection of tax, interest, penalties, etc., is endangered.
Levy – the legal seizure of property to satisfy outstanding tax debt.
Lien – a legal claim against a debtor’s current and future property when the debtor neglects or refuses to pay a deficiency after demand.
Notice of deficiency – mailed to the taxpayer if consensus is not reached with the examiner in a conference with his or her supervisor or from an administrative appeal. Also referred to as a 90-day letter, it is a prerequisite to assessment.
Notice of Federal Tax Lien – a public notice to creditors that there is a federal tax lien that attaches to the taxpayer’s current property and property acquired after the lien was filed.
Notice of Tax Due and Demand for Payment – an assessment received by a taxpayer when (s)he does not pay the full amount of tax owed. This notice begins the collection process.
Offer in compromise – a payment method that may be accepted by the IRS to settle unpaid tax accounts for less than the full amount of the balance due when the facts support the likelihood the IRS will be unable to collect the debt in full.
Substantial presence test – a test for treatment of certain aliens as U.S. residents for a tax year based on physical presence in the U.S.
Tax return preparer – any person who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or claim for refund under the Internal Revenue Code (IRC).
Taxpayer Assistance Orders (TAOs) – issued in assisting taxpayers suffering significant hardship as a result of how the revenue laws are being enforced.
Trust fund recovery penalty – a penalty imposed against any person who is responsible for collecting or paying withheld income and employment taxes and who willfully fails to pay them. The penalty amount is 100% of the amount of trust fund taxes that were not paid, as well as a criminal fine of up to $10,000 and imprisonment up to 5 years.
More expressions about tax and accounting that you may want to understand.
Acquisition indebtedness – debt incurred in acquiring, constructing, or substantially improving a qualified residence and secured by a qualified residence.
Below-the-line deductions – all the deductions that may be subtracted from adjusted gross income (AGI) to arrive at taxable income.
Capital gain property – property on which a long-term capital gain would be recognized if it were sold on the date of the contribution.
Casualty – the damage, destruction, or loss of property resulting from a sudden, unexpected, or unusual event caused by an external force, such as fire, storm, shipwreck, earthquake, etc.
Casualty gain – compensation in excess of adjusted basis of property due to a casualty or theft loss.
Home equity indebtedness – all debt other than acquisition debt that is secured by a qualified residence to the extent it does not exceed the fair market value (FMV) of the residence reduced by any acquisition indebtedness. For tax years 2018-2025, the home equity debt must be used to buy, build, or substantially improve the qualified residence.
Investment interest – interest paid or incurred (on debt) to purchase or carry property held for investment.
Net disaster loss – the excess of qualified disaster-related personal casualty losses over personal casualty gains.
Net investment income – any excess of investment income over investment expense(s).
Ordinary income property – property on which ordinary income or short-term capital gain would be recognized if it were sold on the date of the contribution.
Personal interest – includes interest on credit card debt, revolving charge accounts and lines of credit, car loans, loans against life insurance policies, medical fees, and premiums, etc. No personal interest may be deducted.
Qualified disaster-related personal casualty loss – a personal casualty loss that arises in a federally declared disaster on or after January 1, 2016.
Qualified residence – the principal residence of the taxpayer and anyone other residence owned by the taxpayer and used for personal purposes for the greater of more than 14 days or 10% of the number of days during the year in which it is rented.
Qualified residence interest – interest paid or accrued during the tax year on acquisition or home equity indebtedness used to buy, build, or substantially improve a qualified residence that is secured by that qualified residence.
