EA Part 2 key terms

A filing by which an eligible business chooses how it will be taxed federally, such as a partnership or a corporation, instead of accepting the default classification that otherwise applies under the regulations.

Rules that let most unincorporated businesses select their federal tax classification by election rather than by applying multi-factor tests, while certain entities are automatically treated as corporations.

An entity type that is always taxed as a corporation under the regulations regardless of any election, such as a business formed under a state incorporation statute or certain foreign entities.

A single-member limited liability company or similar entity that is not treated as separate from its owner for federal income tax purposes, so its activities are reported on the owner's return.

A limited liability company with one owner that, absent an election otherwise, is ignored for federal tax purposes and reports its business activity on the owner's return using the owner's tax characteristics.

A corporation or LLC that elects pass-through treatment, meeting shareholder, stock, and eligibility limits, so income is taxed to shareholders while the entity generally pays no entity-level income tax.

The filing an eligible entity makes to be treated as an S corporation, requiring timely consent from all shareholders and satisfaction of eligibility requirements on the effective date.

A business with two or more owners that generally pays no entity-level income tax; instead, items of income, gain, loss, deduction, and credit flow through to partners on Schedule K-1.

A partner's or shareholder's adjusted investment in an entity interest, increased by contributions and income allocations and decreased by distributions and losses, which limits deductible losses and determines gain on disposition.

The form an entity issues to each owner reporting the owner's share of income, deductions, credits, and other separately stated items needed to complete the owner's return.

An item of entity income, deduction, gain, loss, or credit that must be reported to owners on its own line rather than combined, because its character or limitation differs at the owner level.

A payment to a partner for services or use of capital that is determined without regard to partnership income and is treated as ordinary income to the partner, deductible by the partnership.

Social Security and Medicare tax imposed on net earnings from self-employment, including a general partner's distributive share of ordinary trade or business income and guaranteed payments.

The form used to compute self-employment tax on net earnings from self-employment and to report the deductible portion of that tax as an adjustment to income.

The form on which a sole proprietor or disregarded entity reports business income and expenses, arriving at net profit or loss that flows to the individual return.

A reconciliation filed with a corporate return showing why book net income differs from taxable income before certain deductions, such as through nondeductible expenses and separately reported items.

A corporate return schedule that reconciles the change in a corporation's accumulated earnings and profits or retained earnings accounts from the beginning to the end of the tax year.

A difference between income reported on financial statements and income reported on a tax return, arising from timing differences such as depreciation methods or permanent differences such as nondeductible penalties.

An accounting method that reports income when actually or constructively received and deductions when paid, subject to limits on deducting items before economic performance occurs.

An accounting method that reports income when the right to receive it becomes fixed and deductions when all events establishing the liability have occurred and economic performance is met.

The requirement that a liability be deductible under the accrual method only when all events establishing the fact of the liability have occurred and the amount can be determined with reasonable accuracy.

A condition limiting accrual-method deductions, generally satisfied when services or property are provided, payments are made for use of property, or the liability is otherwise settled.

The doctrine that income is taxable when it is made available to a taxpayer without substantial restriction, even if the taxpayer has not yet taken physical possession of the funds.

Rules requiring certain producers and resellers to capitalize direct and allocable indirect costs, including some mixed service costs, into inventory or self-constructed property rather than deducting them currently.

The method used to assign cost to items held for sale, such as cost or lower of cost or market, which determines cost of goods sold and therefore gross income for the year.

The amount deducted from gross receipts for the cost of inventory sold during the year, computed using beginning inventory plus purchases less ending inventory.

A threshold measured by average annual gross receipts over the prior three years that determines eligibility for certain simplified rules, including the small business taxpayer exemption from inventory capitalization.

Relief allowing an eligible business under the gross receipts threshold to use the cash method, avoid capitalizing inventory costs, and treat certain inventory as non-incidental materials and supplies.

The modified accelerated cost recovery system, which assigns depreciable property to recovery classes and applies statutory percentages to compute annual depreciation deductions.

An election allowing an eligible business to expense the cost of qualifying tangible personal property in the year placed in service, limited by taxable income and a dollar cap reduced by excess purchases.

An additional first-year deduction equal to a statutory percentage of the cost of qualifying property, applied before regular depreciation and subject to phase-down and eligibility rules.

A deduction for eligible owners of pass-through businesses equal to a percentage of qualified business income, limited by taxable income, wages, and property, or by specified service trade restrictions.

A category of service businesses, such as health, law, accounting, and consulting, whose owners lose the qualified business income deduction above certain income thresholds.

Limits that restrict a taxpayer's deductible losses to the amount economically at risk in an activity, preventing deductions for losses funded by nonrecourse debt or protected arrangements.

Rules that generally disallow deducting losses from passive activities against nonpassive income, with suspended losses carried forward until the activity generates income or is disposed of.

A standard using hours and other tests to determine whether a taxpayer participates in a business enough that it is not treated as a passive activity.

A penalty tax on corporations that retain earnings beyond the reasonable needs of the business rather than distributing them to shareholders as dividends.

A deduction allowed to a corporation for a percentage of dividends received from another domestic corporation, reflecting the extent of the recipient's ownership in the payer.

The annual return filed by a C corporation to report income, deductions, credits, and tax liability, including supporting schedules for balance sheet, reconciliations, and ownership.

The annual information return filed by a partnership to report its income, deductions, and other items, along with each partner's distributive share on Schedule K-1.

The annual return filed by an S corporation to report its income, deductions, credits, and each shareholder's pro rata share of separately stated items.

A trust that may hold S corporation stock, taxed on its S corporation income at the trust level at the highest corporate rate rather than passing that income to beneficiaries.

A trust whose income, deductions, and credits are taxed directly to the person who created or holds powers over it, reported on that person's individual return.

The annual return filed by an estate or non-grantor trust to report income, deductions, and distributions, including the amounts carried out to beneficiaries on Schedule K-1.

A computed ceiling on the amount of an estate's or trust's income that can be taxed to beneficiaries rather than the entity, and on the entity's corresponding distribution deduction.

The annual information return filed by tax-exempt organizations to report mission-related activities, revenue, expenses, and compliance with exemption requirements.

Income from a regularly carried-on trade or business that is not substantially related to an exempt organization's purpose, subject to tax and reported on the exempt organization's return.

The return filed by an electing large partnership, a largely superseded regime that simplified reporting for partnerships meeting size thresholds under prior law.