Abatement
In general, a decrease in taxes. For example, a tax decrease, reduction in
penalties or rebate.
Ability to pay
The idea that taxes should vary according to the level of wealth or income.
Accelerated Depreciation
Various methods of depreciation that yield larger deductions in the earlier
years of the life of an asset than does the straight-line method. The double (or
200 percent) declining balance method is an example of an accelerated
depreciation method.
Accident and Health Benefits
Employee fringe benefits provided by employers through the payment of health and
accident insurance premiums or the establishment of employer-funded medical
reimbursement plans. Employers generally are entitled to a deduction for such
payments. Employees generally exclude the benefits from gross income.
Accountable Plan
A plan for reimbursing employees for expenses such as meals, entertainment,
travel, and transportation incurred for business purposes on behalf of the
employer. A plan is an accountable plan if the employer requires the employee to
account for all business expenses and to return any excess reimbursements. For
employees under an accountable plan, reimbursements aren't entered on the tax
return as income and the expenses aren't deductible.
Accountant
A professional person who develops and maintains the accounting systems,
interprets the data and prepares reports; supervises the work of accounting
employees and participates in management decisions.
Accounting
The process of gathering and preparing of financial information about a business
or other organization in a form that provides accurate and useful records and
enables decisions to be made.
Accounting Earnings
A company's earnings that is reported in the income statement.
Accounting Cycle
The total set of accounting procedures that must be carried out during each
fiscal period.
Accounting Method
The method under which income and expenses are determined for tax purposes.
Major accounting methods are the cash method and the accrual method.
Accounting Period
The 12-month period that a taxpayer uses to determine federal income tax
liability. Unless a taxpayer makes a specific choice to the contrary, his
accounting period is the calendar year.
Accounts Payable
The money that a business owes to its trade creditors. This money is a liability
of the business.
Accounts Receivable
The money that is owed to a business by its customers. This money is considered
an asset of the business.
Accrual Method of Accounting
One of the two most common methods of accounting, the other being the cash
method. Under the accrual method of accounting, income is reported in the tax
year earned, whether or not received, and deductions are claimed in the tax year
incurred, whether or not paid.
Accrued Expense
An expense incurred during an accounting period for which payment is not due
until a later accounting period. This results from the purchase of services
which at the time of accounting have only been partly performed, and are not yet
billable, and have not been paid for.
Accrued Interest
Interest that has been earned but not yet paid or credited; for example,
interest earned on a bond since the last interest payment was made.
Acquisition Debt
Debt incurred to acquire, construct, or improve the taxpayer's principal or
secondary residence.
Active Income
For purposes of the passive loss rules, income must be divided into three
categories: active income, passive income, and portfolio income. Active income
is income for which the taxpayer performs services. Examples are wages, salaries,
tips, bonuses, and business and partnership income in which the taxpayer
materially participates in the business or partnership. See Passive Income and
Portfolio Income.
Active Participant
A taxpayer who is covered by an employer-maintained qualified retirement plan,
or a qualified self-employed retirement plan, if even for only one day during
the year.
Actual Expenses (Regular Method)
The method of deducting automobile expenses based on actual costs incurred.
Additional Child Tax Credit
A refundable credit available to taxpayers with three or more children
qualifying for the child tax credit and whose regular child tax credit exceeds
tax liability minus other nonrefundable credits. The additional child tax credit
is computed on Form 8812. See also Child Tax Credit.
Adjusted Basis
The cost or other original basis of property reduced by adjustments such as
depreciation allowed or allowable and increased by capital improvements and
other adjustments.
Adjusted Gross Income
Used to determine how much of your income is taxable. AGI consists of gross
income from taxable sources minus your maximum allowable adjustments.
Adjusting entry
An entry made before finalizing the books for the period to apportion amounts of
revenue or expense to the proper accounting periods or operating divisions.
Adjustment to Income
An expense that may be deducted even if the taxpayer does not itemize deductions.
Adjustments to income are subtracted from gross income to arrive at adjusted
gross income.
Adoption Credit
A nonrefundable credit for qualified adoption expenses incurred for each
eligible child. The credit cannot exceed $5,000 per child, or $6,000 per
special-needs child. The limit is a per-child limit, not an annual limit, and
can be carried forward for five years or until used.
Advance Earned Income Credit
Payment by an employer based on an employee's claim to entitlement to the earned
income credit. Advance earned income credit payments are treated as additional
taxes on the tax return.
Advance Payments
Prepayments for services or goods that generally are includable in gross income
upon receipt for both accrual - and cash-basis taxpayers.
After Tax Profit Margin
The ratio calculated by taking net income after taxes divided by net sales.
Alien
Any person who is not a citizen of the country in which they live.
Alimony Payments
Payments made by one spouse to the other spouse or former spouse under a
separation or divorce agreement. Qualified alimony and separate maintenance
payments are includable in the gross income of the recipient and are deductible
by the payer. Child support payments, voluntary payments, and property
settlements are not treated as alimony.
Alternative Assets
Referring to nontraditional that has potential economic value to the owner such
as collectibles. Some examples include art, antiques, precious metals, and
other collectibles such as beanie babies or hockey cards.
Alternative Minimum Tax (AMT)
The alternative minimum tax is designed to prevent taxpayers from escaping a
fair share of tax liability by use of certain tax breaks. A taxpayer is subject
to this tax if he or she has certain minimum tax adjustments or tax preference
items and his or her alternative minimum taxable income exceeds the exemption
allowed for his or her filing status and income level. The alternative minimum
tax is computed on Form 6251.
Alternative Straight-Line Depreciation System
A MACRS (Modified Accelerated Cost Recovery System) system of depreciation using
the straight-line method over an alternative (usually longer) recovery period.
Amended Return
A tax return filed on Form 1040X after the original return has been filed. An
amended return is used to correct errors or to claim more advantageous ways of
filing the original return. An amended return can also be used to carry back
certain unused credits or a net operating loss.
Amortization
The deduction of certain capital expenses over a fixed period of time.
Amortization is claimed on Form 4562. Amortizable expenses include business
start-up expenses, qualified forestation or reforestation costs, goodwill,
going-concern value, covenants not to compete, franchises, trademarks, trade
names, and section 197 costs.
Amount Realized
The amount received by a taxpayer on the sale or exchange of property. The
amount received is the sum of the cash and the fair market value of any property
or services plus any of the seller's liabilities assumed by the purchaser.
Determining the amount realized is the starting point for arriving at realized
gain or loss.
Annualized Income
The actual income and expenditures for a particular period multiplied by the
ratio of the number of months in the period to 12 months.
Annuitant
A person who receives a pension or an annuity.
Annuity
A fixed sum payable to a person at specified intervals for a specific period of
time or for life. Payments represent a partial return of capital and a return on
the capital investment. Therefore, an exclusion ratio must generally be used to
compute the taxable and nontaxable amounts.
Annuity Starting Date
The first day of the first period for which an amount is due as an annuity
payment under an annuity contract.
Appreciation
The increase in value of an asset.
Assessed Value
The estimated value of property used for tax purposes.
Assessor
A local government official who determines the value of the property for
taxation purposes.
Asset
An item of useful or valuable property. Anything owned that has a dollar value.
Asset Allocation
An investment portfolio that divides assets among major asset categories, such
as bonds, stocks or cash, usually to balance risk and create diversification.
Assignment
The transfer of your rights or property to another person or business.
At-Risk Rules
Special rules limiting the taxpayer's deductible business, partnership, S
corporation, or real estate loss to cash invested plus debt he or she is legally
obligated to pay and the adjusted basis of any property contributed.
Audit
An IRS examination and verification of a taxpayer's return or other transactions
with tax consequences. An office audit is an audit by the IRS that is conducted
in the agent's office. A field audit is conducted by the IRS on the business
premises of the taxpayer or in the office of the tax practitioner representing
the taxpayer.
Automobile Expenses
Automobile expenses are generally deductible to the extent the automobile is
used in business or for the production of income. Personal commuting expenses
are not deductible. The taxpayer may deduct actual expenses (including
depreciation and insurance) or the standard (optional) mileage rate may be used
during any one year. For 1999, the standard business mileage rate was 32.5 cents
per mile from January 1 through March 31, and 31 cents per mile for the remainder
of the year. The standard business mileage rate for 2000 is 32.5 cents per mile.
Automobile expenses incurred for charitable activities, medical purposes, and
in connection with job-related moving expenses are deductible to the extent of
actual out-of-pocket expenses for gas and oil or at the rate of 14 cents per
mile for charitable activities, and 10 cents per mile for medical purposes and
job-related moving expenses.
Average Life
An estimate of the number of terms to maturity, taking the possibility of early
payments into account. Average life is calculated using the weighted average
time to the receipt of all future cash flows, using the weights the dollar
amounts of the principal paid each period.
Away from Home
The Revenue Canada definition of being away from your home longer than a normal
workday, that is, where you require sleep.
Go
back to the Definition Index page
Also, check out our
certification explanation page here!
Would you like us to
add a word or phrase? Email us at
glossary@bookkeeperlist.com
