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Tax Glossary

The tax and accounting terms that actually matter, in plain English.

Every entry includes a worked example and the statute, regulation, or IRS guidance behind it.

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terms, each with a worked example and the authority behind it.

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Q
R
S
W

A

Treas. Reg. §1.62-2

Accountable Plan

An accountable plan is a formal reimbursement arrangement that lets a business repay owners and employees for business expenses they paid personally,...

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IRC §446(c)(2); §451

Accrual Basis Accounting

Accrual basis accounting recognizes income when the right to it is fixed and the amount determinable the all-events test, and deducts expenses when...

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IRC Section 1368(e); Treas. Reg. Section 1.1368-2

Accumulated Adjustments Account (AAA)

The accumulated adjustments account AAA is a corporate-level ledger every S corporation maintains to track income that has already been taxed to its...

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IRC §6511; Form 1040-X

Amended Return

An amended return corrects a filed tax return: individuals file Form 1040-X, corporations file 1120-X, and partnerships generally file an...

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IRC §2503(b)

Annual Gift Tax Exclusion

The annual gift tax exclusion is the amount one person can give to any other person in a calendar year with no gift tax, no gift tax return, and no...

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IRC §465; Form 6198

At-Risk Limitation

The at-risk rules of Section 465 are a second gate a loss must pass through after basis: a taxpayer can deduct losses from an activity only up to the...

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IRC Section 280A(g)

Augusta Rule (Section 280A(g))

The Augusta rule is the nickname for IRC Section 280Ag, which lets a homeowner rent out a personal residence for 14 or fewer days in a year and...

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B

IRC §408A(d)(3); Form 8606

Backdoor Roth IRA

The backdoor Roth IRA is a two-step maneuver that gets money into a Roth IRA for taxpayers whose income exceeds the direct contribution limits:...

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IRC §168(k)

Bonus Depreciation

Bonus depreciation under IRC Section 168k lets a business deduct the entire cost of qualifying equipment and other short-lived property in the year...

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IRC Section 1374

Built-In Gains (BIG) Tax

The built-in gains BIG tax under IRC Section 1374 is a corporate-level tax that applies when a C corporation converts to an S corporation and then...

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IRC §274(n)

Business Meals Deduction

The business meals deduction lets a business write off 50% of the cost of food and beverages that are ordinary and necessary to the business, not...

C

IRC §11

C Corporation

A C corporation is the default federal tax classification for a corporation: a fully separate taxpayer that files Form 1120 and pays tax on its own...

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IRC §446(c)(1); §448

Cash Basis Accounting

Cash basis accounting recognizes income when payment is actually or constructively received and deducts expenses when they are paid. It is the method...

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IRC §168; Hospital Corp. of America v. Commissioner, 109 T.C. 21 (1997)

Cost Segregation

Cost segregation is an engineering-based study that breaks a purchased or constructed building into components that depreciate at different speeds....

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D

Treas. Reg. §1.263(a)-1(f)

De Minimis Safe Harbor

The de minimis safe harbor is an annual election under Treas. Reg. Section 1.263a-1f that lets a business deduct small equipment and property...

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IRC §1366(d); Treas. Reg. §1.1366-2

Debt Basis (S Corporation)

Debt basis is the second basis account an S corporation shareholder keeps alongside stock basis, and it exists only for money the shareholder has...

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IRC §§412, 415(b)

Defined Benefit Plan

A defined benefit plan is a pension your own business promises to fund, and it supports the largest deductible retirement contributions in the tax...

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IRC §§1245, 1250

Depreciation Recapture

Depreciation recapture is the rule that claws back prior depreciation deductions when you sell a depreciated asset at a gain. Deductions taken under...

E

IRC §6654; Form 2210

Estimated Tax Penalty

The estimated tax penalty is interest the IRS charges when tax is paid too late within the year, even if the return is filed and fully paid by April....

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IRC §461(l); Form 461

Excess Business Loss Limitation

The excess business loss limitation under Section 461l caps how much net business loss a noncorporate taxpayer can deduct against non-business income...

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F

IRC §6081; Forms 4868 / 7004

Filing Extension

A filing extension gives more time to file a tax return, not more time to pay. Individuals file Form 4868 for an automatic six-month extension to...

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IRM 20.1.1.3.3.2.1

First-Time Penalty Abatement (FTA)

First-time penalty abatement is an administrative waiver the IRS grants almost automatically to taxpayers with a clean compliance history, removing...

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IRC §6041A; IRC §6071(c); IRC §§6721-6722; Form 1099-NEC

Form 1099-NEC

Form 1099-NEC reports nonemployee compensation: what a business paid an independent contractor, freelancer, or other unincorporated service provider...

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IRC §6037; IRC §6699; Form 1120-S

Form 1120-S (S Corporation Tax Return)

G

IRC §707(c)

Guaranteed Payments

Guaranteed payments are amounts a partnership pays a partner for services or for the use of capital that are determined without regard to partnership...

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H

IRC §§105, 106; §9831(d) (QSEHRA)

Health Reimbursement Arrangement (HRA)

An HRA is an employer-funded arrangement that reimburses employees tax-free for medical expenses and, in some versions, insurance premiums:...

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IRC §223

Health Savings Account (HSA)

A health savings account HSA is the only account in the tax code with a triple benefit: contributions are deductible, growth is untaxed, and...

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IRC §3121(b)(3)(A)

Hiring Your Children

Paying your children reasonable wages for real work in your business converts high-bracket parent income into low-or-zero-bracket child income while...

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IRC §280A(c)

Home Office Deduction

I

IRC §453; Form 6252

Installment Sale

An installment sale spreads gain recognition over the years payments are actually received when at least one payment arrives after the year of sale,...

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IRC §63(d); Schedule A (Form 1040)

Itemized Deductions

Itemized deductions are the specific personal expenses Congress allows on Schedule A in place of the standard deduction: state and local taxes...

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L

Rev. Proc. 2013-30

Late S Election Relief

Late S election relief is the IRS's standing administrative program that lets a business rescue a missed Form 2553 deadline without a private letter...

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Treas. Reg. §301.7701-3

Limited Liability Company (LLC)

An LLC is a state-law entity that gives its owners a liability shield while leaving federal tax treatment up to an election. Under the check-the-box...

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IRC §1(h); §1222

Long-Term Capital Gains

Long-term capital gains are profits from selling capital assets, such as stock, crypto, real estate, or a business, held for more than one year. They...

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M

IRC §168; Form 4562

MACRS (Modified Accelerated Cost Recovery System)

MACRS is the default depreciation system for tangible property placed in service after 1986. It assigns every asset a recovery period 5 years for...

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Treas. Reg. §1.469-5T

Material Participation

Material participation is the standard that decides whether a business activity is passive or non-passive for a given taxpayer. The regulations...

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N

IRC §1411; Form 8960

Net Investment Income Tax (NIIT)

The net investment income tax is a 3.8% federal surtax on investment income, owed on top of regular income tax and capital gains rates, by taxpayers...

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IRC §172

Net Operating Loss (NOL)

A net operating loss arises when your allowable deductions exceed your gross income for the year, so the business loss is bigger than everything else...

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O

IRC §731 (partnerships); IRC §1368 (S corporations)

Owner's Draw

An owner's draw is money a sole proprietor or partner takes out of the business for personal use. Draws are not wages, are not deductible by the...

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P

IRC §701; Subchapter K

Partnership

A partnership is a business with two or more owners that is taxed under Subchapter K of the Internal Revenue Code. The partnership files an...

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IRS Notice 2020-75

Pass-Through Entity Tax (PTET)

A pass-through entity tax is a state-level workaround to the federal cap on state and local tax deductions. Instead of the owners paying state income...

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IRC §469; Form 8582

Passive Activity Loss (PAL) Rules

The passive activity loss rules of Section 469 are the third and usually toughest gate for deducting business and rental losses. Activities in which...

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Q

IRC §199A

Qualified Business Income (QBI) Deduction

The qualified business income QBI deduction under IRC Section 199A lets owners of pass-through businesses deduct up to 20% of their qualified...

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IRC §1(h)(11)

Qualified Dividends

Qualified dividends are dividends from U.S. corporations and eligible foreign corporations that are taxed at the long-term capital gains rates of 0%,...

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IRC §1202

Qualified Small Business Stock (QSBS)

QSBS under Section 1202 is the largest exclusion in the code for startup founders and early investors: gain on the sale of qualifying C corporation...

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IRC §6654; Form 1040-ES

Quarterly Estimated Taxes

R

IRC §469(c)(7)

Real Estate Professional Status (REPS)

Real estate professional status removes the automatic "passive" label that Section 469 puts on all rental activities, allowing a qualifying...

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Rev. Rul. 74-44; IRC §3121(d)(1)

Reasonable Compensation

Reasonable compensation is the W-2 salary an S corporation must pay a shareholder who works in the business before taking profit distributions....

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IRC §41; Form 6765

Research and Development (R&D) Credit

The R&D credit rewards businesses for developing or improving products, processes, software, formulas, or techniques through work that is...

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S

IRC §1362(a); Form 2553; Rev. Proc. 2013-30

S Corp Election (Form 2553)

The S corp election is the filing that turns an eligible corporation or LLC into an S corporation for federal tax purposes. It is made on Form 2553...

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IRC §§1361-1379 (Subchapter S)

S Corporation

An S corporation is a corporation or an LLC that elects corporate treatment that has filed a valid election under Subchapter S of the Internal...

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IRC §6654(d)(1)

Safe Harbor (Estimated Payments)

The estimated tax safe harbor is the rule in IRC Section 6654d1 that guarantees you owe no underpayment penalty for a tax year, no matter how large...

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IRC §164(b)(6)

SALT Cap

The SALT cap limits the itemized deduction for state and local taxes income, sales, and property taxes combined. Introduced at $10,000 in 2018, it...

W

IRC §51; Form 8850

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit WOTC under IRC Section 51 pays employers for hiring people from groups that face barriers to employment. It is a...

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    Treas. Reg. §301.7701-3(b)(1)(ii)

    Disregarded Entity

    A disregarded entity is a business entity with one owner that the IRS ignores for income tax purposes: its activity is reported directly on the...

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    Treas. Reg. §1.6041-3(p); Form 1099-NEC; Form W-9

    Do S Corps Get a 1099?

    Generally, no. Payments to corporations are exempt from Form 1099 reporting, and that exemption covers S corporations. A business that pays an...

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    Form 1120-S is the annual federal tax return of an S corporation. Every domestic corporation, and every LLC taxed as an S corporation, must file it...

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    The home office deduction allows self-employed taxpayers to deduct the costs of the portion of their home used regularly and exclusively for...

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    Quarterly estimated taxes are the prepayments the IRS requires from anyone who earns income with no tax withheld from it: freelancers, creators,...

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    IRC §§6031, 6037; Forms 1065 / 1120-S

    Schedule K-1

    Schedule K-1 is the form a pass-through entity issues to each owner reporting that owner's share of the entity's income, deductions, credits, and...

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    IRC §6037(b); Schedule K-1 (Form 1120-S); IRC §1366; Form 7203

    Schedule K-1 (Form 1120-S)

    Schedule K-1 Form 1120-S is the statement an S corporation gives each shareholder every year showing that owner's share of the company's income,...

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    IRC §1031

    Section 1031 Exchange

    A 1031 exchange lets a real estate investor sell investment or business real property and defer all capital gains tax and depreciation recapture by...

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    IRC §179

    Section 179 Expensing

    Section 179 lets a business elect to deduct the cost of qualifying equipment, off-the-shelf software, and certain building improvements in the year...

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    IRC §83(b)

    Section 83(b) Election

    A Section 83b election lets someone who receives restricted unvested property, usually founder or employee stock subject to vesting, choose to be...

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    IRC §162(l)

    Self-Employed Health Insurance Deduction

    Self-employed taxpayers can deduct 100% of health, dental, and qualified long-term care insurance premiums for themselves, their spouse, and...

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    IRC §1401; Schedule SE

    Self-Employment Tax

    Self-employment tax is Social Security and Medicare for people who work for themselves: sole proprietors, independent contractors, general partners,...

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    IRC §408(k)

    SEP-IRA

    A SEP-IRA is the simplest employer retirement plan for the self-employed: the business contributes up to 25% of each participant's W-2 compensation...

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    IRC §1368

    Shareholder Distributions (S Corporation)

    A shareholder distribution is cash or property an S corporation pays to its owners outside of payroll. For the working owner of a profitable S...

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    Treas. Reg. §1.469-1T(e)(3)(ii)(A)

    Short-Term Rental Loophole

    The short-term rental "loophole" is a quirk in the passive activity regulations: a property whose average guest stay is seven days or less is not...

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    IRC §61; Schedule C (Form 1040)

    Sole Proprietorship

    A sole proprietorship is the default tax treatment for one person doing business without an entity, or through a single-member LLC that has not...

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    IRC §401(k); §415(c)

    Solo 401(k)

    A solo 401k is a full-featured 401k for a business owner with no employees other than a spouse. It allows two contribution streams: an employee...

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    IRC §63(c)

    Standard Deduction

    The standard deduction is the flat, no-receipts amount every taxpayer may subtract from adjusted gross income instead of itemizing deductions. It is...

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    IRC §162; IRS Notice 2025-5

    Standard Mileage Rate

    The standard mileage rate is the IRS-set per-mile amount a business owner can deduct for business use of a personal vehicle instead of tracking...

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    IRC §195

    Startup Costs (Section 195)

    Startup costs are expenses incurred investigating and getting a business ready before it opens: market research, travel to scout locations,...

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    IRC §1014

    Step-Up in Basis

    The step-up in basis resets the tax basis of inherited assets to their fair market value on the owner's date of death, permanently erasing the...

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    IRC §1367; Form 7203

    Stock Basis (S Corporation)

    Stock basis is a shareholder's running investment account in an S corporation, and it controls three things: how much loss the shareholder can...

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