Business Tax Glossary

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

A

Accrual Method

One of the two types of accounting methods used by businesses for tax purposes. Also known as accrual accounting. Under this method, income is reported when it’s earned, not when it’s received. Expenses are also recorded when incurred and not when paid.

Ad Valorem Tax

Derived from the Latin phrase “according to the value,” ad valorem taxes are based on the assessed value of a product or property, typically on an annual basis. They are a major revenue source for local and state governments. The most common ad valorem tax is property taxes.

Adjusted Basis

Adjusted basis is when an asset’s original cost is modified (decreased or increased) due to certain activities or improvements. This new valuation is critical when calculating capital gains or losses.

Adjusted Gross Income (AGI)

AGI is used to determine your tax liability. It is the combination of earned and unearned income (gross income) minus any above-the-line tax deductions and certain other exclusions.

Alternative Minimum Tax (AMT)

The alternative minimum tax (AMT) ensures that higher-income taxpayers pay a minimum amount of federal tax by disallowing or limiting certain deductions and credits.

Amended Return

If there is an error or omission discovered on a previously filed tax return, an individual or business may file an amended return. This corrected return not only includes the original figures, but also any updates and the increased/decreased tax liability, if any.

Amortization

Amortization allows businesses to reduce their income and tax obligations by writing down the value of intangible assets over the useful life of those assets. Examples of intangible assets include patents, trademarks, copyrights, and software licenses.

B

Bad Debt Deduction

A bad debt happens when someone owes your business money, but you can’t collect it, and the debt becomes partly or completely worthless. This could be money you loaned or credit you extended as part of running your business. If the debt was taken on mainly for business reasons, it counts as a business bad debt. You can write it off (deduction) on Schedule C (Form 1040) if you’re a sole proprietor, or on your regular business tax return if you file another type.

Balance Sheet

A balance sheet is a financial statement that essentially gives a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time. Most businesses must include a balance sheet (Schedule L) when submitting their annual return to the IRS.

Basis

Basis is the measurement/value of an asset that is used to calculate capital gains or losses. The original purchase price is its initial basis (also known as cost basis). Over time, the basis is adjusted for changes that either increase or decrease its value (adjusted basis).

Bonus Depreciation

Bonus depreciation is a tax break that lets businesses and self-employed people write off the cost of certain big purchases, such as equipment or machinery, much faster than usual. Instead of spreading out the deduction over many years, you can deduct a large chunk (sometimes 50% or more) in the first year you start using it. After that, you’ll deduct smaller amounts over the remaining life of the item.

Business Expenses

If you earn business income (like from freelancing, contracting, or gig work), you can usually deduct expenses that are both ordinary (common in your line of work) and necessary (helpful for running or growing your business). These deductions lower your taxable profit and, in turn, your tax bill.

Business Use Percentage

Business use percentage is the share of time or usage of something, like a car or home office, that’s solely for work rather than personal use. This percentage helps determine how much of the expense you can deduct on your business taxes.

C

Calendar Year

Calendar year is a business accounting method that runs from January 1 to December 31. Sole proprietors and partnerships typically use this simple accounting method.

Canceled Debt

Canceled debt, also known as cancellation of debt (COD) income, is typically treated as taxable income if the business is no longer required to pay the debt. The canceled debt must be reported as income on the appropriate tax form (varies based on business structure). Some exceptions allow businesses to exclude canceled debt from their gross income, such as debt discharged through bankruptcy, insolvency, or deductible debts.

Capital Expenditure

A capital expenditure is an expense incurred to acquire or upgrade physical or intangible business assets. These long-term investments are depreciated or amortized over their useful life. Examples include vehicles, machinery, and upgrades to existing facilities.

Capital Gain

Capital gains are the profits you make when you sell something valuable, like stocks, real estate, or other investments, for more than you paid for it. Short-term capital gains are profits gained from selling an asset owned for one year or less. These are taxed at the ordinary income tax rate. Long-term capital gains, assets sold after a year of ownership, are taxed at more favorable rates, generally between 0 and 20 percent.

Capital Loss

If you sell an asset for less than its purchase price (adjusted basis), it’s considered a capital loss. You can use a capital loss to offset capital gains and reduce your tax liability. You cannot, however, deduct a loss from the sale of personal property.

Capital-Loss Carryover

A capital loss carryover occurs when your investment losses are bigger than your gains for the year. You can use up to $3,000 of those losses to lower other income (like wages), and any leftover losses can be carried forward to future years until they’re fully used.

Cash Method

The cash method is one of two accounting techniques (the other is the accrual method) used by businesses for tax purposes. Unlike the accrual method, income is reported when it’s received, not earned. Expenses are only recorded when paid, regardless of when they are billed.

Casualty Loss

A casualty loss typically includes damage, destruction, or loss of property due to an unexpected or unusual event. This typically includes losses from a natural disaster (tornado, flood, or hurricane), fire, vandalism, and theft.

C Corporation

A C Corporation (sometimes called a traditional corporation) is a business that’s legally separate from its owners. It pays its own corporate income taxes, which can result in “double taxation” when profits are also taxed as shareholder income. On the upside, it offers the strongest protection for owners’ personal assets if the business faces lawsuits or financial trouble.

Cost Basis

Cost basis is the starting value of an asset for tax purposes, usually the amount you paid to buy it (including taxes, fees, and commissions). In some cases, it may be based on the property’s fair market value or the previous owner’s basis. Cost basis is important because it’s used to figure out your capital gains or losses when you sell the asset.

Currently Not Collectible (CNC)

The IRS may place an overdue tax balance in Currently Not Collectible (CNC) status when a business or individual can prove that paying the tax debt would cause extreme financial hardship. This status temporarily halts certain collection efforts, such as bank levies and garnishments, and relieves the business/taxpayer of having to make any payments on the debt. If the account remains in CNC until the statute of limitations expires, the remaining balance is forgiven.

D

Deferred Compensation

Deferred compensation is when part of your pay is set aside to be received in the future instead of right away. The main benefit is that you don’t pay income tax on it until you actually receive the money.

Deferred Tax Asset

A deferred tax asset is a credit a company records on its balance sheet that can lower future taxes. It usually happens when a company pays more in taxes now than what shows on its financial statements, creating a kind of “prepaid tax” that can be used in later years.

Depreciation 

Depreciation is the process of spreading out the cost of a big purchase, like equipment or property, over several years for tax purposes. Instead of deducting the full cost at once, you claim a portion each year during the asset’s useful life. In some cases, businesses can speed this up with bonus depreciation or Section 179. The most common ways to calculate depreciation are the straight-line method and the Modified Accelerated Cost Recovery System (MACRS).

Depreciation Recapture Tax

Depreciation recapture tax is the IRS rule that makes you pay back some of the tax benefits you got from depreciation if you sell an asset for a profit. In other words, if you deducted depreciation on something and later sell it at a gain, part of that gain is taxed.

Double Taxation

Double taxation happens when the same income is taxed twice. A common example is with C corporations: the company pays corporate income tax on its profits, and then shareholders pay personal income tax again on the dividends they receive from those profits.

E

Employer Identification Number (EIN)

Employer identification numbers (EINs) are the business equivalent of a Social Security number (SSN). The IRS assigns this 9-digit number to identify business entities.

Employment Taxes

Employment taxes are federal taxes based on employee wages. They include income tax, Social Security and Medicare (FICA), and federal unemployment tax (FUTA). How often a business must report and pay these taxes depends on its revenue and payroll size.

Estimated Tax

The IRS follows a “pay as you go” system, meaning you must pay taxes throughout the year, not just at filing time. Employees usually cover this through paycheck withholding, but if you earn money from sources like self-employment, dividends, or rental income, you may need to make quarterly estimated tax payments. Generally, your payments must equal at least 90% of the current year’s tax bill or 100% of last year’s (110% for higher incomes). Special rules apply to farmers and fishers.

Excise Tax

An excise tax is a tax on certain goods or services, often applied to things like gasoline, alcohol, and tobacco. It can be used to cover the social costs of these products or to act as a type of user fee – for example, gas taxes help pay for road and highway upkeep.

F

Fair Market Value (FMV)

Fair market value is the price a property would likely sell for on the open market when both buyer and seller are well-informed, willing, and acting reasonably. It’s the legal standard used to judge whether an assessment is fair.

FICA

The Federal Insurance Contributions Act (FICA) is the law that funds Social Security and Medicare through payroll taxes. Employers and employees split the cost: half is withheld from the employee’s paycheck, and the employer pays the other half. Since FICA applies to all wages, it’s often called a payroll tax.

Fiscal Year

Unlike calendar years that run from January 1 to December 31, a fiscal year is any 12-month period used for financial reporting. These typically align with a company’s operational needs or seasonal cycles. For example, the U.S. government operates on a fiscal year that runs from October 1 until September 30 of the following year.

Franchise Tax

A franchise tax is a state tax some businesses must pay for the right to operate or be registered in that state. It’s not just for franchises and is separate from both federal and state income taxes.

FUTA

FUTA stands for the Federal Unemployment Tax Act (FUTA), which provides unemployment compensation payments to those who have lost their jobs. Employers typically pay both federal and state unemployment taxes.

G

Gig Economy

Gig economy work refers to jobs where people earn money outside of traditional employment. Examples include driving for rideshare apps, dog walking, running errands, or freelancing online. The IRS usually treats gig workers as independent contractors, meaning they’re responsible for paying self-employment taxes on their earnings.

Gross Income

Gross income is the total amount of income earned from all sources before any taxes or deductions are subtracted.

Gross Profit

The money a business makes from sales after subtracting the direct costs of making or providing its products or services (also called cost of goods sold, or COGS).

H

Home Office Deduction

The home office deduction is a tax break that allows self-employed individuals and some business owners to deduct certain expenses (direct and indirect) for using part of their home regularly and exclusively for business purposes.

I

Independent Contractor

A self-employed worker who provides services to businesses or the public, usually for multiple clients. They set their own rates and schedules, and unlike employees, taxes are not withheld from their pay. Instead, they must pay income and self-employment taxes themselves, often through estimated tax payments.

Installment Agreement (IA)

An installment agreement, also known as a payment plan, lets taxpayers pay their tax debt in monthly installments instead of all at once. Interest will apply, but certain penalties may be removed or reduced.

Interest

The cost of borrowing money, usually expressed as a percentage of the loan amount. In taxes, the IRS charges interest on unpaid tax balances until they are fully paid.

Interest Income

Money earned from financial accounts like savings accounts or CDs. Most interest income is taxable, though some may be tax-exempt. It is considered “unearned income,” meaning it does not count toward eligibility for the Earned Income Tax Credit (EITC).

L

Limited Liability Company (LLC)

A business structure that protects owners’ personal assets better than a sole proprietorship or partnership. LLCs are also more flexible than corporations in how they can be managed and taxed. A single-member LLC is usually taxed like a sole proprietorship, while multi-member LLCs can choose to be taxed as a partnership, S corporation, or C corporation. This means an LLC may use pass-through taxation or pay corporate income tax.

M

MACRS (Modified Accelerated Cost Recovery System)

The IRS system used by businesses to recover the cost of certain assets through depreciation. Under MACRS, businesses can deduct a larger portion of an asset’s cost in the earlier years of its useful life, and smaller amounts in later years.

Modified Adjusted Gross Income (MAGI)

A version of your Adjusted Gross Income (AGI) with certain tax deductions and exclusions added back. The IRS uses MAGI to determine eligibility for various tax benefits, such as IRA contributions, education credits, and premium tax credits for health insurance.

N

Net Earnings

The amount of money left after subtracting all business expenses, taxes, and other costs from total income. In other words, it’s the actual profit a person or business keeps. For self-employed individuals, net earnings are also what the IRS uses to calculate self-employment tax.

Net Income

The profit a person or business has left after subtracting all expenses, taxes, and costs from total revenue. It shows the actual earnings that can be kept, reinvested, or distributed.

Net Operating Loss

Net Profit

The money left after subtracting all business expenses, including operating costs, taxes, and interest, from gross profit. This is the actual earnings a business keeps. For individuals, net income often means “take-home pay” after taxes and deductions. For businesses, it’s the “bottom line” profit on the income statement.

O

Offer in Compromise (OIC)

An agreement with the IRS (and some state tax agencies) that lets a taxpayer settle their tax debt for less than the full amount owed. The IRS may approve an OIC if paying the full balance would cause financial hardship, or if there’s doubt about the taxpayer’s ability to pay.

P

Partnership

A business owned by two or more people that is not incorporated. Partnerships file IRS Form 1065 to report the business’s income and expenses, and each partner receives a Schedule K-1 showing their share. Partners then report this income on their personal tax returns. Because partnerships are “pass-through entities,” profits and losses flow directly to the partners, who may owe both income tax and self-employment tax.

Pass-through Entity

A type of business where profits and losses “pass through” to the owners’ personal tax returns instead of being taxed at the business level. Common pass-through entities include sole proprietorships, partnerships, S corporations, and most LLCs.

Payroll Taxes

Taxes that employers withhold from employees’ paychecks and also paid by employers to fund government programs. These include Social Security and Medicare taxes (often called FICA), as well as federal and state income tax withholding. Employers are responsible for sending these taxes to the IRS and state tax agencies.

Penalty Abatement

Relief the IRS may grant to reduce or remove tax penalties, such as those for filing or paying late. Penalty abatement is usually available if the taxpayer has a good reason (like serious illness or natural disaster) or meets the IRS “first-time penalty abatement” rules for having a clean compliance history.

Per Diem

A daily allowance paid to employees or contractors to cover work-related travel expenses, such as meals, lodging, and incidentals. Instead of tracking every receipt, the IRS allows employers to use set per diem rates. Amounts within these limits are not considered taxable income.

POA

Power of attorney (POA) is a legal authorization that lets one person act on behalf of another in financial, legal, or tax matters. For IRS purposes, Form 2848 gives a designated representative (such as a tax professional) the authority to communicate with the IRS and make certain decisions for the taxpayer.

Q

Qualified Business Income (QBI)

The net income from a qualified trade or business that may be eligible for the IRS Section 199A deduction. This deduction allows certain owners of pass-through businesses (like sole proprietorships, partnerships, S corporations, and some LLCs) to deduct up to 20% of their QBI on their personal tax return.

Quarterly Taxes

Also known as estimated tax payments, these tax payments are made four times a year (usually in April, June, September, and January) to cover income tax and self-employment tax that isn’t withheld from paychecks. They are commonly required for freelancers, independent contractors, and small business owners to avoid underpayment penalties.

R

Retirement Contribution

Money set aside in a retirement account—such as a 401(k), IRA, or similar plan—either by an employee, self-employed person, or employer. Contributions may be tax-deductible or made with pre-tax income, helping reduce taxable income while saving for the future.

S

Sales Tax 

A state or local tax charged on the sale of goods and certain services. Businesses collect sales tax from customers at the time of purchase and then send it to the appropriate tax authority. The tax rate and rules vary by state and locality.

Sales Tax Nexus

A legal connection between a business and a state (or local tax authority) that requires the business to collect and pay sales tax there. Nexus can be created by having a physical presence (like an office, store, or warehouse) or an economic presence (such as reaching a certain level of sales or transactions in the state).

S-Corporation

A business structure that, like a C-corporation, is legally separate from its owners. Unlike a C-corporation, an S-corporation does not pay corporate income tax. Instead, profits, losses, deductions, and credits “pass through” to shareholders, who report them on their personal tax returns based on ownership share. This pass-through taxation avoids double taxation and can reduce overall tax liability. Certain LLCs can also choose to be taxed as S corporations.

Section 179 Deduction

A tax break that lets businesses deduct the full purchase price of qualifying equipment or software in the year it is placed in service, instead of spreading the deduction out over several years through depreciation. This deduction is designed to help small and mid-sized businesses invest in growth.

Self-Employment Tax

A tax paid by self-employed individuals to cover Social Security and Medicare contributions, similar to the payroll taxes withheld from employees’ paychecks. It is calculated on net earnings from self-employment and reported with the individual’s annual tax return.

SEP (Simplified Employee Pension)

A retirement plan that allows self-employed individuals and small business owners to make tax-deductible contributions to retirement accounts for themselves and their employees. Contributions go into traditional IRAs set up for each participant and grow tax-deferred until withdrawal.

SIMPLE (Savings Incentive Match Plan for Employees)

A retirement plan for small businesses with 100 or fewer employees. Both employers and employees can contribute, with employers required to either match employee contributions (up to a set percentage) or make fixed contributions for all eligible workers. Contributions are tax-deferred, growing until withdrawal.

Sole Proprietor

An individual who owns and runs an unincorporated business alone. The owner and the business are legally the same, meaning the owner is personally responsible for all profits, losses, and debts. Business income and expenses are reported on the owner’s personal tax return.

Standard Mileage Rate

A per-mile rate set each year by the IRS that taxpayers can use to calculate deductible vehicle expenses for business, medical, charitable, or moving purposes (when allowed). Instead of tracking actual costs like gas and maintenance, taxpayers multiply miles driven by the IRS rate to figure their deduction.

Statutory Employee

A worker who is treated as an employee for Social Security and Medicare tax purposes, even though they may be considered self-employed for income tax reporting. Employers withhold and pay Social Security and Medicare taxes for statutory employees, but these workers deduct their business expenses on Schedule C, like self-employed individuals.

T

Tax Audit

A review conducted by the IRS or a state tax authority to verify that a taxpayer’s return is accurate. During an audit, the agency may request documents or explanations to confirm income, deductions, credits, or other tax items. Audits can be done by mail, at an IRS office, or in person.

Tax Credit

A dollar-for-dollar reduction of the taxes you owe. Unlike a deduction, which lowers taxable income, a tax credit directly lowers your tax bill. Some tax credits are refundable, meaning you can get money back even if you owe no tax.

Tax Deduction

An expense that the IRS allows you to subtract from your taxable income, which reduces the amount of income subject to tax. Unlike a tax credit (which directly lowers your tax bill), a deduction lowers your overall taxable income.

Tax Levy

A legal action the IRS or a state tax authority takes to collect unpaid taxes by seizing a taxpayer’s property or assets. This can include wages, bank accounts, or other property. A levy is more serious than a lien because it actually takes the assets to satisfy the debt.

Tax Liability

The total amount of tax a person or business owes to the IRS or a state tax authority for a given period. It represents the legal obligation to pay taxes based on income, business profits, or other taxable activities.

Tax Lien

A legal claim the IRS or a state tax authority places on a taxpayer’s property when taxes are unpaid. The lien protects the government’s interest in the property (such as real estate, vehicles, or financial assets) until the debt is paid. Unlike a levy, a lien does not seize the property but can impact the ability to sell or refinance the property.

Tax Payment Plan

An agreement with the IRS or a state tax agency that lets taxpayers pay their tax debt over time instead of all at once. These plans, often called installment agreements, require monthly payments and may include interest and penalties until the balance is paid in full.

Tax Refund Offset

When the IRS retains or reduces a taxpayer’s refund to pay overdue debts, such as unpaid federal or state taxes, child support, or federal student loans. The amount owed is subtracted from the refund before the remaining balance, if any, is issued.

Tax Year

The 12-month period the IRS uses to calculate income and taxes. For most individual taxpayers, the tax year is the same as the calendar year (January 1–December 31). Some businesses, however, may use a fiscal year that ends in a different month.

Taxable Income

The portion of income that is subject to federal (and sometimes state) income tax after subtracting deductions, exemptions, and certain adjustments from gross income. Taxable income is what the IRS uses to determine how much tax you owe.

U

Underpayment Penalty

The fee the IRS charges when a taxpayer doesn’t pay enough tax during the year, either through paycheck withholding or estimated tax payments. It applies if payments fall short of the required amount, even if the full balance is paid by the tax deadline.

V

Value-Added Tax (VAT)

A type of consumption tax charged on the value a business adds to goods or services at each stage of production. Unlike a retail sales tax collected only at the final sale, VAT is applied throughout the supply chain. VAT is widely used in most countries outside the United States.

W

Withholding

The portion of an employee’s wages that an employer deducts and sends directly to the IRS or state tax agency to cover income taxes. Withholding is a way to prepay taxes throughout the year, and the amount withheld is credited against the employee’s total tax liability when they file their return.