Introduction to Taxation Law
Expert-defined terms from the Professional Certificate in Taxation Risk Management course at London School of Business and Administration. Free to read, free to share, paired with a professional course.
Accrual Basis – A method of accounting that records income and expenses w… #
Related terms: cash basis, revenue recognition. Example: A consulting firm invoices a client in December for services performed in November; the revenue is recorded in November under accrual accounting. Practical application: Ensures tax liability reflects economic activity, aiding accurate tax planning. Challenges: Requires detailed record‑keeping and may complicate cash‑flow forecasting.
Adjusted Gross Income (AGI) – The total gross income of an individual aft… #
Related terms: gross income, taxable income, deductions. Example: A taxpayer with $80,000 gross salary and $5,000 student‑loan interest deduction has an AGI of $75,000. Practical application: Determines eligibility for credits such as the Earned Income Tax Credit. Challenges: Mis‑classification of deductible items can lead to under‑ or over‑statement of AGI.
Amortization – The systematic allocation of the cost of an intangible ass… #
Related terms: depreciation, intangible assets, useful life. Example: A company purchases a patent for $120,000 with a 10‑year legal life and amortizes $12,000 each year. Practical application: Reduces taxable income gradually, matching expense with benefit. Challenges: Determining the correct amortization period and method (straight‑line vs. accelerated) under tax law.
Alternative Minimum Tax (AMT) – A parallel tax calculation designed to en… #
Related terms: regular tax, exemption amount, tentative minimum tax. Example: A high‑income individual with numerous itemized deductions may owe AMT even if regular tax liability is low. Practical application: Requires dual calculations during tax return preparation. Challenges: Complex calculation rules and frequent legislative changes create compliance risk.
Basis – The amount of investment in property for tax purposes, used to de… #
Related terms: adjusted basis, cost basis, carryover basis. Example: An investor purchases shares for $10,000 and adds $500 in commissions; the basis is $10,500. Practical application: Accurate basis calculation is essential for capital‑gain reporting. Challenges: Tracking adjustments for improvements, depreciation, and previous losses.
Bracket Creep – The phenomenon where inflation pushes taxpayers into high… #
Related terms: inflation indexing, tax brackets, real income. Example: If inflation is 3 % and tax brackets are not indexed, a taxpayer earning the same real wage may move from a 22 % to a 24 % bracket. Practical application: Policymakers may adjust brackets annually to mitigate bracket creep. Challenges: Failure to index brackets can erode disposable income and create perceived tax increases.
Capital Gains – Profit realized from the sale of a capital asset, such as… #
Related terms: capital losses, holding period, short‑term gain. Example: Selling a stock bought for $5,000 at $7,500 yields a $2,500 capital gain. Practical application: Tax planning may involve timing sales to benefit from lower long‑term rates. Challenges: Determining the correct holding period and applying the appropriate tax rate.
Capital Losses – Deductions allowed when a capital asset is sold for less… #
Related terms: capital gains, net capital loss, carryforward. Example: An investor incurs a $3,000 loss on a bond sale; this loss can offset $3,000 of capital gains. Practical application: Losses can be carried forward to future tax years. Challenges: Tracking loss carryforwards across multiple tax years and jurisdictions.
Cash Basis – An accounting method that records income when cash is receiv… #
Related terms: accrual basis, revenue recognition, tax timing. Example: A freelance graphic designer records income only when the client pays the invoice. Practical application: Simpler for small businesses, aligning tax payments with cash flow. Challenges: May distort true economic performance and limit deduction timing.
Charitable Contribution Deduction – A tax benefit allowing donors to redu… #
Related terms: itemized deduction, qualified charity, AGI limitation. Example: A taxpayer donates $2,000 to a recognized charity and claims the amount as an itemized deduction. Practical application: Encourages philanthropy and can lower tax liability. Challenges: Verifying charitable status and adhering to contribution limits (e.g., 60 % of AGI).
Corporate Tax Rate – The statutory percentage applied to a corporation’s… #
Related terms: effective tax rate, marginal rate, tax brackets. Example: A corporation with $1 million taxable income and a 21 % corporate tax rate owes $210,000 in federal tax. Practical application: Influences decisions on investment, financing, and profit distribution. Challenges: Interaction with state taxes and the impact of deductions and credits on the effective rate.
Depreciation – An expense deduction allowing the cost of a tangible asset… #
Related terms: amortization, Section 179, MACRS. Example: A company purchases a delivery truck for $50,000 and depreciates it over five years, claiming $10,000 per year. Practical application: Reduces taxable income while reflecting asset wear. Challenges: Selecting the correct depreciation method and recovery period under the tax code.
Deferred Tax Asset (DTA) – An asset on the balance sheet representing fut… #
Related terms: deferred tax liability, temporary difference, tax planning. Example: A firm expects to use a net operating loss (NOL) carryforward to offset future taxable income, creating a DTA. Practical application: Improves cash flow forecasting and financial statement analysis. Challenges: Assessing the realizability of DTAs and complying with valuation allowance requirements.
Deferred Tax Liability (DTL) – A liability reflecting taxes payable in fu… #
Related terms: deferred tax asset, timing difference, tax provision. Example: Accelerated depreciation for tax purposes creates a DTL because book depreciation is slower. Practical application: Highlights future tax obligations for investors. Challenges: Managing the impact of changing tax rates on DTL valuation.
Double Taxation – The situation where the same income is taxed at two dif… #
Related terms: dividend taxation, pass‑through entity, integration. Example: A corporation pays $100 million profit tax, then distributes $50 million as dividends, which shareholders also tax. Practical application: Influences entity selection for business structuring. Challenges: Mitigating double taxation through tax credits or restructuring.
Earned Income Tax Credit (EITC) – A refundable credit for low‑ to moderat… #
Related terms: refundable credit, phase‑out range, qualifying child. Example: A single parent earning $20,000 may receive an EITC of $3,000, reducing tax liability and possibly resulting in a refund. Practical application: Provides financial relief and incentivizes labor participation. Challenges: Complex eligibility criteria and potential for mis‑claiming.
Effective Tax Rate (ETR) – The average rate at which an entity’s pre‑tax… #
Related terms: statutory rate, marginal rate, tax burden. Example: A corporation with $200,000 taxable income and $40,000 tax expense has an ETR of 20 %. Practical application: Assists in benchmarking tax efficiency across peers. Challenges: Distinguishing between statutory and effective rates, especially when extensive credits are involved.
Estate Tax – A tax on the transfer of a deceased person’s assets to heirs… #
Related terms: inheritance tax, unified credit, step‑up basis. Example: An estate valued at $12 million, with a $12.06 million exemption, incurs no estate tax. Practical application: Estate planning strategies aim to minimize exposure. Challenges: Navigating changing exemption thresholds and valuation disputes.
Exempt Organization – An entity recognized by tax authorities as exempt f… #
Related terms: 501(c)(3), tax‑exempt status, nonprofit. Example: A community foundation qualifies as a 501(c)(3) and does not pay income tax on its investment earnings. Practical application: Enables donors to claim charitable deductions. Challenges: Maintaining compliance with public‑charity requirements and annual reporting.
Expenditure – Any outflow of cash or other assets incurred in the pursuit… #
Related terms: expense, capital expenditure, deduction. Example: Office supplies purchased for $500 are an expense deductible in the year incurred. Practical application: Determines timing of tax deductions. Challenges: Properly classifying expenditures to avoid disallowed deductions.
Exemption – An amount excluded from taxable income, reducing the tax base #
Related terms: personal exemption, dependent exemption, standard deduction. Example: Prior to 2018, a taxpayer could claim a $4,050 personal exemption per qualifying individual. Practical application: Lowers overall tax liability. Challenges: Legislative changes can eliminate or modify exemptions, affecting tax planning.
Filing Status – The classification used on an individual tax return that… #
Related terms: single, married filing jointly, head of household. Example: A married couple filing jointly may benefit from a higher standard deduction than filing separately. Practical application: Impacts tax liability and eligibility for credits. Challenges: Determining the optimal status when marital or dependents’ situations change.
Fiscal Year – A 12‑month period used for accounting and tax reporting tha… #
Related terms: tax year, accounting period, year‑end. Example: A corporation may adopt a fiscal year ending June 30 to align with its industry cycle. Practical application: Allows businesses to match reporting with operational rhythms. Challenges: Adjusting to a non‑calendar year can complicate tax compliance and filing deadlines.
Flat Tax – A tax system that applies a single rate to all taxable income,… #
Related terms: progressive tax, tax reform, rate uniformity. Example: A proposal for a 20 % flat tax would tax both low‑ and high‑income earners at the same rate. Practical application: Simplifies tax calculation and compliance. Challenges: Potentially regressive effects and political resistance.
Foreign Tax Credit (FTC) – A credit allowing taxpayers to offset domestic… #
Related terms: double taxation, treaty, limitation. Example: A U.S. citizen pays $5,000 tax on foreign dividends and claims a $5,000 FTC against U.S. tax. Practical application: Prevents double taxation of international income. Challenges: Complex allocation rules and carryback/carryforward limitations.
Gift Tax – A tax on the transfer of property by one individual to another… #
Related terms: unified credit, annual exclusion, generation‑skipping transfer. Example: A donor gives $17,000 to a child in 2024; amounts above the $17,000 exemption are subject to gift tax. Practical application: Estate planners use annual exclusions to reduce future estate tax exposure. Challenges: Tracking cumulative gifts and filing timely gift tax returns.
Gross Income – The total income received from all sources before deductio… #
Related terms: AGI, taxable income, income inclusions. Example: Salary, interest, dividends, and rental income together constitute gross income. Practical application: Serves as the starting point for tax calculations. Challenges: Determining which items are includable, especially foreign or fringe benefits.
Harassment Penalty – A punitive surcharge imposed for repeated non‑compli… #
Related terms: failure‑to‑file penalty, interest, compliance audit. Example: A taxpayer who repeatedly files late may incur a harassment penalty in addition to standard interest. Practical application: Encourages timely compliance. Challenges: Calculating penalty amounts and defending against wrongful assessments.
Harmonized Sales Tax (HST) – A consumption tax used in certain jurisdicti… #
Related terms: GST, PST, value‑added tax. Example: In Canada, Ontario applies a 13 % HST on most goods and services. Practical application: Simplifies tax collection for businesses operating across provinces. Challenges: Determining applicability of exemptions and compliance with filing frequencies.
Imputed Income – The value of non‑cash benefits received, such as employe… #
Related terms: fringe benefit, taxable value, non‑cash compensation. Example: An employee uses a company car with a fair market value of $8,000; the imputed income is added to wages. Practical application: Ensures proper taxation of all compensation forms. Challenges: Valuing benefits accurately and maintaining documentation.
Incentive‑Based Tax Credit – A credit offered to encourage specific behav… #
Related terms: refundable credit, non‑refundable credit, eligibility criteria. Example: A manufacturer installing solar panels may claim a 30 % investment tax credit. Practical application: Reduces after‑tax cost of qualifying projects. Challenges: Meeting documentation requirements and navigating phase‑out schedules.
Income Splitting – A tax planning technique where income is distributed a… #
Related terms: attribution rules, family trust, split‑income strategies. Example: A high‑earning parent pays a reasonable salary to a child who works in the family business, reducing the parent’s taxable income. Practical application: Lowers household tax burden. Challenges: Attribution rules may reassign income back to the higher‑earning spouse, limiting benefits.
Interest Deduction – The allowance to subtract interest paid on qualified… #
Related terms: qualified debt, limitation, investment interest. Example: A business incurs $10,000 interest on a loan used to purchase equipment, which is deductible. Practical application: Encourages borrowing for productive investments. Challenges: Distinguishing between deductible and non‑deductible interest, such as personal credit‑card interest.
International Taxation – The set of rules governing taxation of cross‑bor… #
Related terms: transfer pricing, withholding tax, double taxation. Example: A U.S. subsidiary pays royalties to its foreign parent; withholding tax may apply based on treaty provisions. Practical application: Guides multinational corporations in structuring operations. Challenges: Navigating differing jurisdictional rules and anti‑avoidance measures.
Itemized Deduction – A list of expenses that a taxpayer may elect to dedu… #
Related terms: Schedule A, medical expenses, charitable contributions. Example: Taxpayers may itemize mortgage interest, state taxes, and charitable donations if the total exceeds the standard deduction. Practical application: Potentially lowers taxable income more than the standard deduction. Challenges: Requires detailed record‑keeping and may be limited by phase‑outs.
Judgment Lien – A court‑ordered claim against property for unpaid debts,… #
Related terms: tax lien, priority, enforcement. Example: A creditor obtains a judgment lien on a taxpayer’s real estate; the tax authority must assess lien priority before collection. Practical application: Impacts asset valuation and liquidation strategies. Challenges: Managing multiple liens and negotiating settlements.
Loss Carryforward – The ability to apply net operating losses (NOLs) or c… #
Related terms: loss carryback, NOL, tax credit. Example: A corporation with a $2 million NOL can offset future profits for up to 20 years under current rules. Practical application: Provides tax relief during downturns. Challenges: Tracking expiration dates and changes in tax law that modify carryforward periods.
Management Fee – Compensation paid to a manager for services rendered, wh… #
Related terms: related‑party transaction, deductible expense, transfer pricing. Example: A parent company pays a subsidiary a $500,000 management fee for administrative support; the fee must be reasonable and documented. Practical application: Allows cost sharing across entities. Challenges: Proving that fees are not inflated for tax avoidance.
Marginal Tax Rate – The tax rate applied to the next dollar of taxable in… #
Related terms: effective tax rate, tax bracket, progressive tax. Example: If a taxpayer is in the 24 % bracket, their marginal rate is 24 % on income above the bracket threshold. Practical application: Influences decisions on additional work, investment, or deductions. Challenges: Misunderstanding marginal versus average rates can lead to suboptimal financial choices.
Materiality – The threshold at which a misstatement or omission in tax re… #
Related terms: audit risk, immaterial, financial statements. Example: A $5,000 error in a $5 million tax return may be deemed immaterial. Practical application: Guides auditors and tax preparers in focusing on high‑impact items. Challenges: Determining materiality can be subjective and varies by jurisdiction.
Medium‑Term Tax Planning – Strategies aimed at optimizing tax outcomes ov… #
Related terms: strategic planning, forecasting, tax shelter. Example: A corporation may schedule capital expenditures to align with anticipated changes in depreciation rules. Practical application: Aligns tax considerations with business cycles. Challenges: Requires accurate legislative forecasting and flexibility to adjust to unexpected law changes.
Merger – A corporate restructuring where two or more companies combine in… #
Related terms: acquisition, tax-free reorganization, continuity of interest. Example: Company A merges with Company B in a stock‑swap transaction qualifying as a tax‑free reorganization under Section 368(a)(1). Practical application: Enables strategic growth while deferring tax. Challenges: Meeting statutory requirements and handling complex asset basis calculations.
Minimum Taxable Income (MTI) – A threshold amount that determines whether… #
Related terms: filing threshold, tax exemption, revenue test. Example: A small business with revenue below the MTI may be exempt from filing a corporate income tax return. Practical application: Reduces compliance burden for low‑revenue entities. Challenges: Monitoring revenue fluctuations to avoid inadvertent filing obligations.
Net Operating Loss (NOL) – A situation where a taxpayer’s deductible expe… #
Related terms: loss carryforward, loss carryback, tax shelter. Example: A startup incurs $500,000 in expenses and only $200,000 in revenue, creating a $300,000 NOL. Practical application: Provides tax relief and can improve cash flow. Challenges: Legislative limits on NOL utilization and potential expiration dates.
Non‑Resident Alien (NRA) – An individual who is not a citizen or resident… #
Related terms: residency test, withholding tax, treaty benefits. Example: A foreign consultant performing services in the U.S. may be taxed only on U.S.‑source income, with a 30 % withholding rate unless reduced by treaty. Practical application: Determines filing requirements and withholding obligations. Challenges: Correctly applying residency rules and treaty provisions.
Non‑Refundable Credit – A tax credit that can reduce tax liability to zer… #
Related terms: refundable credit, tax offset, limitation. Example: A $1,000 non‑refundable credit applied to a $800 tax liability reduces the liability to zero, with $200 of the credit unused. Practical application: Lowers tax burden but requires careful planning to avoid waste. Challenges: Managing credit timing to maximize utilization.
Operating Expense – Ordinary and necessary costs incurred in the day‑to‑d… #
Related terms: expense, cost of goods sold, capital expense. Example: Salaries, rent, utilities, and office supplies are operating expenses. Practical application: Reduces taxable income and reflects true profitability. Challenges: Distinguishing between deductible operating expenses and capitalizable assets.
Pass‑Through Entity – A business structure (e #
g., partnership, S corporation, LLC) where income is passed through to owners and taxed at individual rates, avoiding double taxation. Related terms: flow‑through, entity classification, self‑employment tax. Example: An S corporation’s earnings are reported on shareholders’ personal returns. Practical application: Enables tax efficiency for small to medium enterprises. Challenges: Compliance with eligibility rules and potential self‑employment tax implications.
Patent Box – A tax incentive regime that applies a reduced corporate tax… #
Related terms: IP tax credit, R&D incentive, preferential rate. Example: A company earns $2 million from patented technology and benefits from a 10 % tax rate instead of the standard 21 %. Practical application: Enhances after‑tax return on R&D investments. Challenges: Complex qualification criteria and anti‑abuse rules.
Pay‑As‑You‑Earn (PAYE) – A withholding system where employers deduct inco… #
Related terms: payroll tax, withholding, tax remittance. Example: An employee’s salary is subject to monthly PAYE deductions based on projected annual liability. Practical application: Improves cash‑flow timing for both employees and government. Challenges: Accurate calculation of deductions and timely remittance to avoid penalties.
Per‑Diem Allowance – A daily reimbursement for travel expenses, often tre… #
Related terms: travel expense, de minimis, imputed income. Example: An employee traveling for business receives a $150 per‑diem for meals and lodging, which is excluded from taxable wages if within the allowed amount. Practical application: Simplifies expense reporting. Challenges: Monitoring compliance with jurisdictional per‑diem rates.
Permanent Difference – An item that creates a divergence between taxable… #
Related terms: temporary difference, book‑tax difference, tax reconciliation. Example: Tax‑exempt interest received on municipal bonds is a permanent difference because it is never taxable. Practical application: Helps reconcile financial statements with tax returns. Challenges: Identifying all permanent differences for accurate tax provision.
Personal Service Corporation (PSC) – A corporation primarily engaged in t… #
g., health, law, consulting) where earnings are taxed at a flat rate. Related terms: flat tax, qualified personal services, corporate tax. Example: A law firm organized as a PSC pays a 21 % tax on its entire taxable income, regardless of profit levels. Practical application: May result in higher tax than other structures for low‑margin businesses. Challenges: Strict definition and potential recharacterization by tax authorities.
Phantom Income – Income that is taxable despite the taxpayer not receivin… #
Related terms: constructive receipt, cancellation of debt, imputed income. Example: A borrower receives a $10,000 debt cancellation, which is treated as taxable income. Practical application: Affects cash‑flow planning because tax must be paid without cash receipt. Challenges: Managing liquidity to cover tax on non‑cash income.
Placeholder Tax – An interim tax estimate used when final liability canno… #
Related terms: estimated tax, provisional assessment, reconciliation. Example: A multinational files a placeholder tax on anticipated cross‑border royalties, later adjusting when actual amounts are known. Practical application: Enables timely compliance while awaiting final data. Challenges: Accurate estimation to avoid over‑ or under‑payment penalties.
Portfolio Income – Earnings derived from investment activities, including… #
Related terms: passive income, qualified dividend, tax‑exempt bond. Example: An investor earns $3,000 in qualified dividends, taxed at the long‑term capital‑gain rate. Practical application: Influences asset allocation decisions. Challenges: Tracking differing tax treatments for various portfolio components.
Preferential Tax Rate – A reduced tax rate applied to certain types of in… #
Related terms: ordinary rate, qualified dividend, tax bracket. Example: Long‑term capital gains may be taxed at 15 % versus a 37 % ordinary rate. Practical application: Encourages long‑term investment. Challenges: Determining eligibility for preferential treatment.
Pre‑Tax Deduction – An expense subtracted from gross income before calcul… #
Related terms: above‑the‑line deduction, AGI, tax‑advantaged plan. Example: An employee contributes $5,000 to a 401(k), reducing AGI by that amount. Practical application: Lowers tax liability while building retirement savings. Challenges: Ensuring contributions stay within statutory limits.
Qualified Business Income (QBI) – The net income from a qualified trade o… #
Related terms: pass‑through deduction, taxable income, income threshold. Example: A sole proprietor earns $150,000 in QBI and may deduct up to 20 % ($30,000), subject to phase‑out rules. Practical application: Provides tax relief for many small businesses. Challenges: Complex interaction with W‑2 wages and property basis.
Qualified Dividend – A dividend that meets specific criteria for preferen… #
S. corporation and held for a required period. Related terms: ordinary dividend, holding period, tax rate. Example: A shareholder receiving a qualified dividend of $2,000 may be taxed at 15 % instead of the ordinary rate. Practical application: Influences portfolio dividend strategy. Challenges: Tracking holding periods and corporate eligibility.
Qualified Opportunity Zone (QOZ) – A designated geographic area where inv… #
Related terms: 1031 exchange, tax deferral, long‑term investment. Example: An investor reinvests $250,000 of capital gains into a QOZ fund, deferring tax until the earlier of sale or 2026. Practical application: Stimulates economic development in underserved areas. Challenges: Compliance with strict investment and reporting requirements.
Qualified Retirement Plan – A tax‑advantaged savings vehicle that meets I… #
Related terms: 401(k), IRA, pension. Example: A company sponsors a 401(k) plan, permitting employees to defer up to $22,500 per year. Practical application: Encourages employee savings and reduces employer payroll taxes. Challenges: Administrative complexity and nondiscrimination testing.
Qualified Taxpayer – An individual or entity that meets statutory criteri… #
Related terms: eligibility, qualification test, statutory definition. Example: Only a qualified taxpayer may claim the Child Tax Credit, requiring a valid Social Security number for each child. Practical application: Determines who can access specific tax relief. Challenges: Verifying qualification status and maintaining documentation.
Qualified Trust – A trust that meets legal standards for favorable tax tr… #
Related terms: grantor trust, irrevocable trust, tax‑exempt status. Example: A charitable remainder trust qualifies for a charitable deduction and defers capital gains tax. Practical application: Provides income streams while supporting philanthropic goals. Challenges: Complex drafting and compliance with distribution rules.
Quash – To nullify or set aside a tax assessment, lien, or levy, often th… #
Related terms: abatement, relief, tax dispute. Example: A taxpayer successfully petitions to quash a penalty for erroneous underpayment. Practical application: Reduces liability when errors are identified. Challenges: Demonstrating sufficient cause and navigating procedural timelines.
Qualified Withholding Agent – An entity authorized to withhold tax on pay… #
Related terms: withholding tax, FATCA, Form 1042‑S. Example: A U.S. brokerage withholds 30 % on dividend payments to a foreign investor, filing the required forms as a qualified withholding agent. Practical application: Ensures compliance with international tax obligations. Challenges: Maintaining accurate records of foreign payees and applying treaty rates.
Rate Schedule – A table or formula specifying tax rates applicable to var… #
Related terms: tax brackets, marginal rate, progressive tax. Example: The federal income tax schedule lists rates from 10 % to 37 % across defined income ranges. Practical application: Guides taxpayers in estimating liability. Challenges: Frequent legislative updates require constant monitoring.
Real Estate Investment Trust (REIT) – A corporation that owns, operates,… #
Related terms: pass‑through entity, dividend, property income. Example: A REIT earns rental income and passes most of it to shareholders, who pay tax on dividends at ordinary rates. Practical application: Offers investors liquidity and diversified real‑estate exposure. Challenges: Maintaining the 90 % distribution requirement and managing taxable vs. non‑taxable income.
Recapture – The inclusion of previously deducted depreciation or other al… #
Related terms: depreciation, capital gain, section 1245. Example: Selling a depreciated machine for $15,000 after claiming $5,000 depreciation triggers a $5,000 recapture taxed at ordinary rates. Practical application: Affects timing of asset sales. Challenges: Calculating correct recapture amounts and tax rates.
Refundable Tax Credit – A credit that can generate a cash refund if it ex… #
Related terms: non‑refundable credit, tax offset, excess credit. Example: The Child Tax Credit of $3,600 may be fully refundable for low‑income families, resulting in a cash payment. Practical application: Provides immediate financial assistance. Challenges: Complex eligibility rules and phase‑out thresholds.
Regulatory Tax – A tax imposed by a specific regulatory authority, often… #
Related terms: excise tax, compliance, sector tax. Example: A fuel company pays a carbon tax based on emissions volumes. Practical application: Encourages compliance with policy goals. Challenges: Tracking multiple regulatory regimes and integrating them into overall tax strategy.
Replacement Asset – An asset acquired to replace an existing one, often q… #
Related terms: like‑kind exchange, Section 1031, asset turnover. Example: A farmer exchanges an old tractor for a new model under a like‑kind provision, deferring gain recognition. Practical application: Allows continued operation without immediate tax impact. Challenges: Meeting strict exchange criteria and timing requirements.
Revenue Recognition – The accounting principle dictating when revenue is… #
Related terms: accrual accounting, matching principle, deferred revenue. Example: A software company recognizes subscription revenue over the contract term rather than upon receipt of cash. Practical application: Aligns tax liability with actual performance. Challenges: Complex contracts and multi‑element arrangements can complicate recognition.
Rollover – The transfer of funds from one tax‑advantaged account to anoth… #
Related terms: 401(k) to IRA rollover, qualified distribution, tax deferral. Example: An employee moves a 401(k) balance to an IRA after leaving employment, avoiding current taxation. Practical application: Maintains retirement savings growth. Challenges: Strict time limits (typically 60 days) and potential penalties for errors.
Section 179 Expensing – An election allowing businesses to deduct the ful… #
Related terms: depreciation, expense deduction, asset threshold. Example: A company purchases equipment for $150,000 and elects Section 179, deducting the entire amount in the first year. Practical application: Improves cash flow by accelerating deductions. Challenges: Limits on total expensing and phase‑out at higher expenditure levels.
Section 199A Deduction – A deduction up to 20 % of qualified business inc… #
Related terms: QBI, pass‑through deduction, taxable income. Example: A partnership with $200,000 QBI and sufficient wages may claim a $40,000 deduction. Practical application: Reduces effective tax rates for eligible businesses. Challenges: Complex calculations and interaction with other deductions.
Section 280E – A provision disallowing deductions and credits for busines… #
Related terms: cannabis taxation, non‑deductible expense, tax penalty. Example: A dispensary cannot deduct advertising expenses, increasing its effective tax rate. Practical application: Highlights the need for meticulous cost‑of‑goods‑sold tracking. Challenges: Limited ability to offset high operating costs, leading to compliance risk.
Self‑Employment Tax – The tax imposed on net earnings of self‑employed in… #
Related terms: Schedule SE, net earnings, qualified business income. Example: A freelancer with $80,000 net earnings pays 15.3 % self‑employment tax ($12,240). Practical application: