Tax Glossary

Business structures

C corporation

A corporation that pays its own income tax. When it pays profits out to owners as dividends, the owners pay tax on them too.

S corporation

A corporation that has elected to pass its income through to its owners, who report it on their own returns. The business itself generally pays no federal income tax. Owners who work in the business must pay themselves a reasonable salary through payroll.

Partnership

A business with two or more owners that passes its income through to them. Each owner's share is reported on a Schedule K-1.

LLC (limited liability company)

A state-law structure that protects owners' personal assets. For tax purposes it is treated as a sole proprietorship, a partnership, or a corporation, depending on how many owners it has and what it elects.

Sole proprietorship

A business owned by one person and not set up as a separate entity. Its income goes on the owner's personal return.

EIN (employer identification number)

The business's federal tax ID number, like a Social Security number for the business.

Reasonable compensation

The salary an S corporation owner who works in the business must take through payroll before taking other distributions. It should match what the work would pay someone else.

Tax returns

Form 1120

The federal income tax return for a C corporation.

Form 1120-S

The federal income tax return for an S corporation.

Form 1065

The federal income tax return for a partnership or a multi-member LLC.

Schedule K-1

The form a partnership or S corporation gives each owner showing their share of income, deductions, and credits. Owners need it to file their own returns, which is why these business returns are due earlier.

Tax year and fiscal year

The 12 months a return covers. Most businesses use the calendar year. A fiscal year ends in a month other than December, and its deadlines shift to match.

Extension

More time to file a return, usually six months. It is not more time to pay. Tax owed is still due on the original date.

Amended return

A corrected return filed after the original, when something was missed or has changed.

Estimated tax payments

Tax paid during the year on income as it is earned, instead of all at once when the return is filed. Corporations pay them four times a year. Paying too little, or late, can mean a penalty.

Deduction

An expense that reduces taxable income. The practice finds every legitimate one and claims nothing that cannot be defended.

Depreciation

Spreading the cost of equipment, vehicles, or buildings over the years they are used, rather than deducting it all at once. Some purchases can be deducted faster under special rules. Ask Bill.

Power of attorney (Form 2848)

A signed form that lets Bill speak with the IRS on a client's behalf. California uses its own form for the Franchise Tax Board.

Payroll

Gross pay and net pay

Gross pay is what an employee earns before anything is taken out. Net pay is what they actually receive after taxes and other deductions.

Withholding

Income tax taken out of each paycheck and sent to the government for the employee.

FICA

Social Security and Medicare taxes. The employee pays half through withholding, and the employer pays a matching half.

FUTA

Federal unemployment tax, paid by the employer only.

State unemployment insurance

Unemployment tax paid to the state: in Nevada to the Employment Security Division, in California to the Employment Development Department.

Payroll tax deposits

Withheld and employer payroll taxes, sent to the IRS and the state on a set schedule, monthly or more often depending on the size of the payroll.

Form 941

The quarterly federal payroll tax return, reporting wages paid and taxes withheld and deposited.

Form 940

The annual federal unemployment (FUTA) tax return.

Form W-2

The year-end statement of an employee's wages and withholding, sent to the employee and to the Social Security Administration.

Form W-4

The form a new employee fills out so the employer knows how much income tax to withhold.

Employee or contractor

An employee works under the business's direction and is paid through payroll. An independent contractor runs their own business and is paid as a vendor. The difference is decided by the facts of the work, not by what the parties call it, and getting it wrong is expensive. Ask Bill.

Accounts payable and monthly accounting

Accounts payable

Bills the business owes to vendors and has not yet paid.

Accounts receivable

Money customers owe the business and have not yet paid.

Form W-9

The form a vendor or contractor gives the business with their name and tax ID. Collect it before the first payment; it is needed for 1099s.

Form 1099-NEC

The year-end form reporting payments to an independent contractor, sent to the contractor and the IRS when payments for the year reach the reporting threshold.

Form 1099-MISC

The year-end form reporting certain other payments, such as rent, when they reach the reporting threshold.

Bank reconciliation

Matching the business's books to the bank statement, line by line, so every deposit and payment is accounted for and nothing is missing or recorded twice.

Month-end close

The work done after each month ends: reconciling bank and credit card accounts, recording what is owed and owing, and balancing the books, so the numbers for the month are complete and right.

General ledger

The complete record of every transaction in the business, organized by account.

Chart of accounts

The list of categories the business uses to sort its income, expenses, assets, and debts.

Cash basis and accrual basis

Two ways to keep books. Cash basis records income when money comes in and expenses when they are paid. Accrual basis records them when they are earned or owed, regardless of when cash moves.

Profit and loss statement

A report of income and expenses for a period, showing whether the business made or lost money. Also called an income statement.

Balance sheet

A snapshot of what the business owns, what it owes, and the owners' equity on a given date.

IRS and state notices

Notice

A letter from the IRS or a state tax agency about a return or an account. Each one names the issue and the deadline to respond. Most have a clear path. Send it to Bill as soon as it arrives.

IRS audit (examination)

The IRS reviewing a return to check that it is correct.

Correspondence audit

An examination handled by mail, usually about a few specific items.

Office or field audit

An examination held in person at an IRS office, or at the business or the CPA's office. These usually cover more of the return.

Penalty relief (abatement)

A request to remove a penalty, either because of a reasonable cause or because the business has a clean record. Interest generally still applies.

Installment agreement

A payment plan with the IRS or a state agency for tax that cannot be paid all at once.

Offer in compromise

A request to settle a tax debt for less than the full amount. Rarely accepted, and only when the agency agrees the full amount cannot be collected.

Lien

A legal claim the government files against property for unpaid tax.

Levy

The government actually taking property or money, such as from a bank account or wages, to pay a tax debt. It comes only after a series of notices, which is why notices should never be set aside.

Appeal

Taking a disagreement with an examination result to an independent office within the IRS before going to court.

Statute of limitations

The window the IRS has to examine a return and assess more tax. Generally three years from filing, longer in some situations.

Nevada

Nevada has no income tax on businesses or individuals. Businesses still owe the taxes and filings below.

Modified Business Tax (MBT)

A quarterly Nevada tax on wages paid by employers above an exempt amount.

Commerce Tax

An annual Nevada tax on businesses with more than $4 million in Nevada gross revenue for the year ending June 30. Businesses at or under that amount do not file.

State business license

The license every business operating in Nevada must hold, renewed each year with the Secretary of State.

Annual list

The yearly filing with the Nevada Secretary of State listing an entity's officers or managers, filed with the business license renewal.

Department of Taxation

The Nevada agency for the Modified Business Tax, Commerce Tax, and sales tax.

Employment Security Division

The Nevada agency, part of the Department of Employment, Training and Rehabilitation (DETR), that handles state unemployment insurance.

California

Franchise Tax Board (FTB)

California's income and franchise tax agency.

Franchise tax

California's tax on corporations for the privilege of doing business in the state.

Minimum franchise tax

The $800 a year most corporations and LLCs doing business in California owe, even with no profit or a loss.

Doing business in California

The test for whether a business, including a Nevada business, owes California tax and filings. It depends on activity, sales, property, and payroll in the state. This matters for businesses that work on both sides of the lake. Ask Bill.

Employment Development Department (EDD)

California's payroll tax and unemployment insurance agency.

DE 9 and DE 9C

California's quarterly payroll reports: DE 9 for the taxes, DE 9C for each employee's wages.

DE 542

California's report of independent contractors, filed shortly after a business pays or contracts with a contractor above a set amount.

Statement of Information

The filing with the California Secretary of State listing an entity's officers or managers and address, filed every year for corporations and every two years for LLCs.

CDTFA

The California Department of Tax and Fee Administration, which handles sales and use tax.