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Tax Glossary

Arm yourself with an understanding of the basic terms and phrases used by people in the small business accounting industry. You’ll be able to communicate easier with tax professionals and grasp the information you receive much quicker.


Accounting Period
The period time (month, quarter or year) for which a financial statement is issued. Can also be used to refer to the year of the entity for tax and accounting purposes.

glossary of small business tax termsAccounts Payable
This represents what a business owes to its suppliers and other vendors and creditors at a given point in time.

Accounts Receivable
This represents invoices or amounts due from the business customers at a given point in time.

Accrual Method of Accounting
A method of keeping the books in which income and expenses are allocated to periods to which they apply, regardless of when actually received or paid. For example: revenue is recognized when invoiced, not when cash is collected.

A verification of financial records and accounting procedures generally conducted by a CPA firm. Another type of audit is a tax audit conducted the IRS. In this type of audit the IRS verifies the accuracy of the income and deductions reported in the tax return.


Balance Sheet
The financial statement that shows assets, liabilities and owner’s equity in the business at a specific time.

A third party obligation promising to pay if a vendor does not fulfill its valid obligations under a contract. Types of bonds include Surety, Bid Performance, Indemnity and Payment. This term also refers to debt issued publicly by a large corporation.

Break-even point
The point at which sales equals total costs.


Capital Asset
A piece of equipment, furniture or vehicle purchased for long-term in the business.

Cash Accounting
The simplest and most common of form of accounting in a small business. Revenue is recognized when received and expenses are recognized when paid. May allow more flexibility than the accrual accounting method for timing net income between years.

Cash Flow Statement
The third statement of the financial statements. Takes net income and adjusts it to a cash basis. Non-cash item, such as depreciation, are added back to net income to convert to a “cash flow” basis.

An asset that can be sold for cash and which has been pledged to a creditor to secure a future obligation.

The lowest level of financial statement preparation done by an E.A. or C.P.A. It involves putting the company’s financial statements into GAAP format, but not performing any level of review or audit.

Compound Interest
Interest earned on previously accumulated interest plus the original principal.

An agreement between two or more parties in which each promises to perform in some way. Contracts are complex and should be reviewed by an attorney.

Certified Public Accountant — a certification obtained through the state by meeting education and experience standards and passing a difficult two day national exam.

“S” Corporation
A regular corporation that makes an election with the IRS by filing form 2553. The corporation then becomes a pass-through entity similar to a partnership. Consult form 2553 for the requirements of an “S” corporation.

“C” Corporation
A regular corporation that has double taxation on dividends.

Credit Report

A listing of an individual or company’s history of repaying past loans and other liabilities. Tracked by three independent reporting agencies and effects loan rates, ability to obtain loans, insurance costs and other financial products.


A method of financing the operations of a company that doesn’t involve equity, but must be paid back according to the terms of the borrowing instrument.

The decrease in the value of assets, such as equipment, over time. Depreciation is deductible at rates prescribed by IRS regulations. GAAP depreciation may differ in amount from tax depreciation.


Enrolled Agent — a designation granted by the IRS to practice before them by taking an exam given by the IRS on a regular basis.

Employer Identification Number (EIN)
A number obtained from the IRS by filing form SS-4. If you are a sole proprietorship, your social security number is your EIN. However, a single person LLC should obtain an EIN.

Equity Financing
A form a financing, different from debt, where the owner sells part of the company to an outside investor. This is no obligation to repay this type of financing. It is typically provided by venture capital firms.

Temporary monetary deposit with an independent third party by agreement between two or more parties. The escrow money is released with certain conditions are met.

Employee Stock Ownership Plan — A retirement plan where employees have a vested interest in the company through stock ownership.

The investments and assets of a deceased individual available for his or her heirs.


The buying and selling of accounts receivable.

A person who is entrusted with assets owned by another individual (beneficiary), and responsible for investing the assets until they are turned over to the beneficiary.

Fiscal Year
A 12 month period used by a company as their accounting period.

Fixed Cost
A production cost that does not vary significantly with volume of output.

A form of licensing a business. The franchiser provides name recognition, marketing and a business model for a fee to the franchisee.


Generally Accepted Accounting Principles — accounting principles put forth by CPA’s authority organization that reflect a fair presentation of the financial statements in line with other companies that have GAAP financial statements.


Obligation of one party to reimburse another party for losses which have occurred or which may occur.

Internal Revenue Service — The department of the U.S. Treasury, empowered by law to collect taxes.

IRS Agent
An employee of the Internal Revenue Service that audits taxpayers to determine compliance with the the U.S. tax laws.


Legal right to hold property of another party or to have it sold or applied in payment of a claim.

Limited Liability Company – A state entity that has the legal characteristics of a corporation but is taxed, in most cases, as a partnership.

The ending of an entity’s life by paying off all liabilities and any net distributing assets.


Marginal Cost
Additional cost associated with producing one more unit of output.


Business expenses not directly related to a particular good or service produced. An example would be rent.


An business of two or more people that is not incorporated. This business would file form 1065 with the IRS for it’s business tax return.

Profit and Loss Statement
A listing of income and expenses and the net profit or loss of the business. Also referred to as the income statement.


A financial statement preparation by a CPA that involves more work than a compilation, including limited testing of the balance sheet, but less work than an audit.

Retirement Plan
A vehicle that allows contributions to employees retirement accounts with a corresponding tax deduction in most cases.


Small Business Administration — A division of the US Government that specializes in helping small businesses in the U.S.

Small Business Investment Corporation — A venture capital entity that is partially funded by the SBA to assist small business obtain capital.

Service Corps of Retired Executives — A volunteer management assistance program of the SBA. Provide one-on-one counseling and seminars for small businesses.

Section 179
Refers to the Internal Revenue Code Section that allows a first year write-off of fixed assets, including furniture, equipment and machinery.

Standard Industrial Classification Code — A number assigned to identify a business based on the type of business or trade. A business can determine its SIC number by looking it up in a directory published by the Department of Commerce.

Simple Interest
Interest paid only on the principal of a loan

Sole Proprietorship
The simplest form of business organization, where an individual is liable for all debts and obligations of the business.

Surety Bonds
Provide reimbursement to an individual, company or the government if a firm fails to complete a contract.

Sweat Equity
The investment in time an owner makes in a business without being paid a salary.


An entity formed to hold money or investments for a purpose that is taxed separately, in most cases, from the grantor.

Travel and Entertainment
Expenditures incurred in a business to meet with and develop business with customers.


Variable Cost
Any costs which change significantly with the level of output. A good example is materials used in the finished product.

Venture Capital
Money or capital provided to new businesses with exiting growth potential.