To better serve our clients, we've listed the below common tax terms to help you understand the IRS and tax language.
Active Income: Income earned from active participation in a trade, business, or employment.
Adjusted Gross Income (AGI): The total gross income of an individual or business minus specific deductions, such as certain business expenses, retirement contributions, and student loan interest.
Amortization: The process of spreading the cost of intangible assets (e.g., patents, trademarks) over their useful life for tax purposes.
Bad Debt: An unpaid debt that a business or individual had previously claimed as income but is now uncollectible and can be deducted as a loss for tax purposes.
Bonus Depreciation: A tax deduction method that allows businesses to recover the costs of qualifying assets faster by deducting a percentage of the asset's cost in the year it is placed in service. The percentage that can be deductible can vary year to year.
Capital Gains: The profits earned from the sale of capital assets, such as stocks, real estate, or investments, which are subject to special tax rates.
Capital Loss Limitation: The limit on the amount of capital losses that can be deducted against ordinary income in a given tax year.
Depreciation Recapture: The process of adding back certain previously claimed depreciation deductions when selling or disposing of an asset, resulting in a tax liability.
Estimated Tax Payment (1040-ES): Quarterly tax payments made by individuals who expect to owe a significant amount of tax at year-end, typically used by self-employed individuals or those with additional income sources. The payment dates are generally April 15th, June 15th, September 15th, and January 15th of the following year.
Form 1040: The standard individual income tax return form used by U.S. taxpayers to report their annual income and calculate their tax liability.
Form 1098-T: A tax form provided by educational institutions to students to report tuition payments and other qualified education expenses.
Form 1099-K: A form used to report certain payment transactions, such as credit card and third-party network transactions, for businesses and individuals.
Form 8879: An IRS e-file Signature Authorization form that authorizes tax practitioners to electronically file tax returns on behalf of their clients.
Form K-1: A tax form used by partnerships, S corporations, and some trusts to report each partner's or shareholder's share of income, deductions, and credits.
Franchise Report: A report filed with state authorities by businesses that operate under a franchise agreement.
Incentive Stock Options: Stock options granted to employees that have specific tax advantages, subject to certain holding periods and tax treatment.
Investment Interest Expense: Interest paid on loans used to purchase investment assets, which may be tax-deductible up to certain limits.
IRA (Individual Retirement Account): A tax-advantaged retirement account that allows individuals to contribute and invest funds for retirement savings. Individuals will generally receive a tax deduction when making a contribution but owe taxes when taking distributions.
Itemized Deductions: Specific eligible expenses that taxpayers can list and deduct from their taxable income, often used when the total of these deductions exceeds the standard deduction amount.
Late Filing Penalty: The failure-to-file penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty will not exceed 25% of your unpaid taxes. This penalty is assessed if there is no extension in place or if you file your return and owe taxes after the extension deadline has lapsed.
Late Payment Penalty: The late payment penalty is 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%. You will not have to pay the penalty if you can show reasonable cause for the failure to pay on time. This penalty is assessed even if an extension is filed.
Long-Term Rental: The rental of property for an extended duration, typically more than 30 days, and subject to different tax treatment compared to short-term rentals.
Loss Carryforward: A tax provision that allows businesses or individuals to offset losses from one year against future income to reduce taxable income in those subsequent years.
Married Filing Separate: A filing status option for married taxpayers who choose to file separate tax returns instead of a joint return.
Material Participation: The level of involvement in a business activity that determines whether it is considered a passive or non-passive activity for tax purposes.
Miscellaneous Deductions (subject to 2%): Certain itemized deductions that were subject to a 2% adjusted gross income (AGI) limitation before being suspended under
NOL (Net Operating Loss): The amount by which a business's expenses exceed its revenue, resulting in a loss that can be used to offset taxable income in previous or future years.
Passive Income: Income earned from investments or business activities in which the individual is not materially involved.
Passive Loss: A loss incurred from a passive activity, such as real estate rental, which can only be offset against passive income.
Pass-through Business Owner: An individual who owns a pass-through entity and reports the business's income and deductions on their personal tax return.
Passthrough/Flowthrough Income: Income earned by pass-through entities, such as partnerships, S corporations, or sole proprietorships, which is passed through to the owners and reported on their individual tax returns.
Payment Voucher (1040-V): A document used by taxpayers to submit their tax payments to the IRS when filing Form 1040. This form would be accompanied by a check for any tax payment.
Portfolio Income: Income generated from various investments, such as dividends, interest, and capital gains.
QBI (Qualified Business Income): The net amount of income, gain, deduction, and loss generated by a qualified business.
QBI Deduction: A deduction that allows eligible taxpayers to deduct a percentage of their qualified business income from their taxable income.
QBI Tax Deduction (Qualified Business Income Deduction): A deduction for certain pass-through business owners that allows them to deduct up to a percentage of their qualified business income from their taxable income.
Related Party Rentals: Rental agreements between individuals or businesses with a close relationship, subject to specific tax regulations.
Related Party Sales: Transactions between individuals or businesses with a close relationship, such as family members or businesses under common control, subject to special tax rules.
Roth IRA: A type of IRA that allows individuals to make after-tax contributions, and qualified distributions, including earnings, are tax-free.
Safe Harbor: A provision in tax law that provides taxpayers with a predefined method to comply with certain tax rules, ensuring they will not be subject to penalties or audits if they meet the criteria outlined.
Sch A: Schedule A, a tax form used to itemize deductions on individual tax returns.
Sch C: Schedule C, a tax form used by sole proprietors and single-member LLCs to report their business income and expenses.
Sch E: Schedule E, a tax form used to report rental income and certain other income and expenses.
Self-Employed Health Insurance: Health insurance premiums paid by self-employed individuals that are tax-deductible.
SEP (Simplified Employee Pension): A retirement plan that allows small business owners and self-employed individuals to contribute and deduct funds for retirement savings.
Short-Term Rental: The rental of property for a short duration, often less than 30 days, typically used for vacation or temporary housing.
SIMPLE (Savings Incentive Match Plan for Employees): A retirement plan designed for small businesses, allowing both employers and employees to make contributions.
SMLLC (Single-Member Limited Liability Company): A limited liability company with a single owner, treated as a disregarded entity for tax purposes (no separate tax filing with the IRS)
Standard Deduction: A fixed dollar amount that eligible taxpayers can deduct from their taxable income without itemizing specific deductions, simplifying the tax filing process for many individuals.
Stock Options: Financial instruments that give individuals the right to buy or sell company stock at a fixed price within a specified timeframe.
Taxable Social Security: A portion of Social Security benefits that may be subject to federal income tax, depending on the recipient's total income.
Underpayment Penalty: An underpayment penalty is a fine levied by the IRS on taxpayers who do not pay enough of their estimated taxes, do not have enough withheld from their wages, or pay late. This penalty can be assessed even if the tax is paid on time.
Working Interest: An ownership interest in an oil or gas well that allows the owner to share in the profits and costs of drilling and production.