Industry Related Definitions
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C
Calendar Year
A year that begins January 1 and ends December 31.
Call
An option to purchase stock at a fixed price within a specified period of time.
Callable
A bond issue, all or part of which may be redeemed before maturity by the
issuing corporation under specific conditions. The term also applies to
preferred shares of stock, which may be redeemed by the issuing corporation.
Capital
The difference between the total assets and total liabilities of a business.
Capital Asset
Broadly speaking, all assets are capital assets except those specifically
excluded by the tax Code. Major categories of non-capital assets include
property held for resale in the normal course of business (inventory), trade
accounts and notes receivable, depreciable property, and real estate used in a
trade or business.
Capital Expenditure
An expenditure made for assets with useful lives of more than one year. Usually
capital expenditures may not be deducted in the year they are paid, even if they
are paid in connection with a trade or business. In other words, they are
capitalized and generally may be depreciated or amortized.
Capital Gain
The gain from the sale or exchange of a capital asset.
Capital Gain Distributions
Amounts paid by mutual funds, regulated investment companies, and real estate
investment trusts. These amounts represent the shareholder's portion of gain from
the sale of capital assets owned by these investment companies. Capital gain
distributions are taxed in the year constructively received and are always
considered to be held long term.
Capital Gain or Loss Holding Period
The length of time a capital asset is owned by the taxpayer. Assets owned 12
months or less are held short term; those owned more than 12 months are held
long term.
Capital Improvement
An improvement made to extend the useful life of a property or add to its value.
Major repairs such as the replacement of a roof are capital improvements. The
costs of capital improvements to business property must be capitalized and may
be depreciated.
Capitalize
To treat the cost of additions and improvements to property as a capital
improvement.
Capital Loss
The loss from the sale or exchange of a capital asset. Up to $3,000 of net
capital loss is deductible annually with the excess carried forward to future
years. Losses on personal-use assets are not deductible.
Capital Stock
Shares of stock that represent ownership of a portion of the corporation.
Carryback/Carryover
Provisions in the tax Code that allow certain losses or credits to be used in a
tax year other than the tax year incurred. A carryover is to a future year. A
carryback is to a prior year.
Cash Equivalent Doctrine
Generally, a cash-basis taxpayer does not report income until cash is
constructively or actually received. Under the cash equivalent doctrine,
cash-basis taxpayers are required to report income if the equivalent of cash
(property, for example) is received in a taxable transaction.
Cash Method of Accounting
One of the two most common methods of accounting, the other being the accrual
method defined elsewhere in this glossary. Under the cash method of accounting,
income is reported in the tax year actually or constructively received and
expenses are deducted in the tax year paid.
Casualty
The complete or partial destruction of property resulting from an identifiable
event of a sudden, unexpected, or unusual nature.
Casualty Loss
A casualty is the complete or partial destruction of property resulting from an
identifiable event of a sudden, unexpected, or unusual nature. Examples are
floods, storms, fires, earthquakes, and auto accidents. Individuals may deduct
a casualty loss only if the loss is incurred in a trade or business, in a
transaction entered into for profit, or is a personal loss arising from a
disaster such as those mentioned above. Individuals deduct personal casualty
losses as itemized deductions on Schedule A, subject to a $100 nondeductible
amount and a reduction of the loss by 10 percent of the taxpayer's AGI. Use of
Form 4684 is required.
Certificate
The actual piece of paper that is evidence of ownership of stock in a
corporation.
Certified Historic Structure
A structure listed on the National Register of Historic Places or located in a
designated historic area. The IRS Code provides tax incentives for the
rehabilitation of such structures.
Change in Accounting Method
A change from one method to another, which usually requires prior approval from
the IRS. A change generally requires adjustments to avoid omissions or
duplications.
Change in Accounting Period
A change from one period to another. Income for the short period created by the
change must be annualized to calculate the tax for that period.
Charitable Contributions
Money or property donated to a qualified charitable organization. Such donations
are deductible on Schedule A as an itemized deduction.
Chart of accounts
A list of the accounts of a business and their numbers, arranged according to
their order in the ledger.
Child and Dependent Care Credit
A tax credit of 20-30 percent of employment-related child and dependent care
expenses for amounts of up to $4,800 is available to individuals who are employed
and maintain a household for a dependent child or disabled spouse or dependent.
The credit is computed on Form 2441 for Form 1040 filers and on Schedule 2 for
Form 1040A filers.
Child Support Payments
Payments pursuant to a court order, divorce decree, or other legal obligation.
Payments for child support do not constitute alimony and are not includable in
gross income by the recipient or deductible as alimony by the payer.
Child Tax Credit
A nonrefundable credit of up to $500 per dependent child under age 17 at the end
of the tax year.
Claim of Right
A term used in the tax Code in connection with money or other property received
as income that the recipient holds, but that he or she is required to restore to
the payer in whole or in part in a later year because it develops that he or she
did not have an unrestricted right to it.
Closed Year
A tax year for which the statute of limitations has expired. The taxpayer can't
claim a refund and the IRS can't collect additional taxes (with certain
exceptions).
Commission
(1) The broker's fee for purchasing or selling securities or property for a
client. (2) An allowance paid to a salesperson or agent for services rendered.
Commodity Futures
Contracts to buy or sell some fixed amount of a commodity (wheat or soy beans,
for example) for a fixed price at a future date.
Common-Law State
A state in which the laws governing property rights are based on British common
law. The property and income of each spouse belongs to him or her separately.
Common Stock
Shares in the ownership of a corporation that are entitled to residual dividends,
after bonds and preferred stock have first received interest and dividends. A
common stockholder usually has a vote in deciding company affairs, including the
election of a corporation's board of directors.
Community Income
Income of a married couple, living in a community property state, which is
considered to belong equally to each spouse, regardless of which spouse receives
the income.
Community Property
Property considered to belong in equal shares to a husband and wife. This concept
of ownership for property acquired after marriage is followed in Arizona,
California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and
Wisconsin.
Commuting
Traveling from one's residence to one's regular place of business and back to the
residence.
Compensation
Wages, commissions, tips, professional fees, and net self-employment income from
services rendered; that is, earned income.
Condemnation
The taking of property by a public authority. The property is condemned as the
result of legal action and the owner is compensated by the public authority. The
power to condemn property is known as the right of eminent domain.
Condemnation Award
Payment in money or replacement property that is received for property condemned
by a government authority.
Constructive Receipt
A cash-basis taxpayer is taxed on income only as it is received. But if the
income was unreservedly subject to his or her demand and he or she could have
received it but chose not to do so, it is regarded as having been constructively
received by him or her and is taxable. For example, interest credited to a
savings account is constructively received even if the taxpayer hasn't withdrawn
it.
Contract Price
An amount payable to the seller and equal to the gross selling price when no
mortgages are involved. If a mortgage is assumed, the contract price is the
gross selling price minus the amount of the mortgage plus the excess (if any) of
the mortgage over the seller's basis and expenses of sale.
Contributions
Gifts to qualified charitable organizations as opposed to gifts to private
individuals. Such contributions are generally deductible on Schedule A.
Convention Expenses
Travel expenses incurred in attending a convention are deductible if the
meetings are related to a taxpayer's trade or business or job-related activities.
If, however, the convention trip is primarily for pleasure or for investment
purposes, no deduction for travel expenses is permitted. Limitations may apply
to foreign convention expenses.
Convertible
A bond or preferred stock that may, under specified conditions, be exchanged for
common stock or another security, usually of the same corporation.
Copyright
The exclusive legal right to sell, reproduce, or publish a literary, musical, or
artistic work.
Corporation
For income tax purposes, this term includes associations, trusts that have a
majority of corporate characteristics, joint stock companies, and insurance
companies.
Cost
Cash and/or the value of property given to acquire the property received.
Cost Depletion
A method for recovering the taxpayer's investment in natural resources or timber.
The cost is recovered ratably as the resource is extracted or the timber
harvested. Total cost depletion cannot be claimed in excess of basis. Percentage
depletion, the other method for computing depletion of natural resources, is
defined elsewhere in this glossary.
Cost Method of Inventory Valuation
Valuing inventory purchased during the year at cost; that is, the invoice
price less any discounts plus transportation or other costs incurred in
acquiring the merchandise.
Cost of Goods Sold
Beginning inventory plus direct purchases, direct labor costs, and overhead
costs less withdrawals for personal use and ending inventory. Sole proprietors
compute their cost of goods sold in Part III of Schedule C.
Cost of Maintaining a Home
Expenses necessary to maintain a taxpayer's residence. These costs include rent
or mortgage interest and real estate taxes, fire and casualty insurance on the
dwelling, upkeep and repairs, utilities, paid domestic help, and food consumed
in the home.
Cost Recovery
The writing off of the capital cost of qualified assets over a specified time
period. See also Accelerated Cost Recovery System (ACRS) and Modified
Accelerated Cost Recovery System (MACRS).
Coupon Bond
A bond with interest coupons attached. The coupons are clipped as they come due
and are presented by the bond holder for payment of accrued interest.
Credits
Reductions of tax liability that Congress has decided should be allowed for
various purposes to taxpayers who meet the qualifications. Some credits are
refundable; that is, the IRS will send the taxpayer a check for any amount in
excess of the tax liability. Most credits are not refundable, but some credits
may be carried to other tax years.
Current assets
Unrestricted cash, an asset that will be converted into cash within one year, or
an asset that will be used up within one year.
Custodial Parent
The parent with whom a child lives for more than half the year.
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