Tax Accountant Examination key terms

The income figure computed after subtracting above-the-line adjustments such as deductible IRA contributions, self-employment tax, and alimony under pre-2019 instruments from total income. It is the starting point for most itemized deduction phaseouts and credit limits.

A deduction taken in arriving at adjusted gross income rather than as an itemized deduction, so it benefits every filer regardless of whether they itemize. Common examples include educator expenses, health savings account contributions, and student loan interest.

An expense that may be deducted only if the taxpayer forgoes the standard deduction and lists qualifying amounts, such as state and local taxes, mortgage interest, charitable gifts, and medical costs above a percentage floor.

A fixed deduction amount set by filing status and indexed annually, available without substantiation. It is used when it exceeds total itemized deductions and is increased for taxpayers who are blind or age 65 or older.

Property held by a taxpayer, including securities and personal-use assets, that is not excluded from capital treatment such as inventory, depreciable business property, or self-created copyrights. Its sale produces capital gain or loss subject to character rules.

The length of time an asset is owned, measured from the day after acquisition through the sale date. Property held more than one year yields long-term gain or loss; shorter ownership yields short-term treatment taxed at ordinary rates.

The excess of net long-term capital gain over net short-term capital loss for the year. It is taxed at preferential maximum rates of 0, 15, or 20 percent depending on taxable income and filing status.

A rule that disallows a loss on the sale of stock or securities when substantially identical property is acquired within 30 days before or after the sale. The disallowed loss is added to the basis of the replacement shares.

A rule preventing losses from rental or trade or business activities in which the taxpayer does not materially participate from offsetting wages, portfolio income, or other active income. Suspended losses become deductible when the activity is disposed of.

A test under the passive activity rules requiring regular, continuous, and substantial involvement in a business, met through any of seven regulatory tests such as more than 500 hours of participation during the year.

A deduction of up to 20 percent of qualified business income from a pass-through entity, limited by W-2 wages and capital investment for high-income taxpayers in specified service trades or businesses, available only to non-corporate owners.

A business structure such as a partnership, S corporation, or single-member LLC that generally pays no entity-level income tax. Income, gain, deductions, and credits flow through to owners, who report them on their own returns.

An entity with two or more owners that generally is not taxed at the entity level. It files an information return and allocates items of income, gain, loss, deduction, and credit to partners according to the partnership agreement.

A partner's or S corporation shareholder's allocated portion of the entity's separately stated and ordinary items for the tax year. It is reported to the owner on a Schedule K-1 and generally retains its character.

A partner's or shareholder's adjusted investment in an ownership interest, increased by contributions and allocable income and decreased by distributions and allocable losses. It limits the losses an owner may currently deduct.

The partnership's or S corporation's adjusted tax basis in its own assets, which may differ from owners' outside basis. Elections under the internal revenue code can adjust inside basis when an interest is transferred.

A corporation that elects pass-through treatment and meets eligibility limits on shareholder number and type and on classes of stock. It generally pays no entity-level tax but must pay reasonable compensation to shareholder-employees.

The amount of wages an S corporation must pay a shareholder-employee for services before making non-wage distributions. It is determined by facts such as duties, training, and comparable pay for similar work.

A penalty tax imposed on a corporation that accumulates earnings beyond the reasonable needs of the business to help shareholders avoid dividend tax. It applies to retained earnings above an exemption amount.

A payment or benefit a corporation provides to a shareholder that is not formally declared as a dividend but is treated as one for tax purposes. Examples include excessive rent, bargain sales, and personal use of corporate property.

A taxpayer's unrecovered investment in property, used to measure gain or loss on sale and to limit deductions such as depreciation. It generally starts at cost or, for gifts and inheritances, at a carryover or stepped-up amount.

The original basis of property increased by capital improvements and decreased by depreciation, depletion, and casualty losses. Gain on sale equals the amount realized minus this figure.

A rule under which a recipient of gifted property takes the donor's adjusted basis and holding period. It preserves the donor's unrealized gain, though loss property is reduced to fair market value for loss purposes.

The rule that property acquired from a decedent generally takes a basis equal to fair market value at the date of death or the alternate valuation date. It eliminates unrealized appreciation at death.

The recharacterization of gain on the sale of depreciable property to the extent of prior depreciation deductions. Real property recapture is taxed at a maximum 25 percent rate, while personal property recapture is ordinary income.

Limits that restrict deductible losses to the amount a taxpayer has economically at risk in an activity, including cash invested and certain borrowed amounts for which the taxpayer is personally liable.

An accounting method recognizing income when actually or constructively received and deductions when paid. It is unavailable to certain entities with inventory unless they meet small-business gross receipts thresholds.

An accounting method recognizing income when the right to receive it becomes fixed and deductions when all events establishing the liability have occurred and the amount can be determined with reasonable accuracy.

A doctrine treating income as received when it is made available to a cash-method taxpayer without substantial restriction, even if the taxpayer declines to take it. It prevents deferral by refusing payment.

A requirement under the accrual method that the underlying activity creating a liability occur before a deduction is allowed, such as services being performed or property being provided to the taxpayer.

A standard of support for a tax return position that is stronger than reasonable basis but weaker than more likely than not, generally found in statutes, regulations, and court decisions. It avoids the accuracy-related penalty.

A confidence standard meaning greater than 50 percent likelihood of being sustained on the merits. It is required to avoid the accuracy-related penalty on tax shelter positions and to rely on certain opinions.

Regulations governing practice before the Internal Revenue Service, covering duties of competence, confidentiality, and written advice standards. It authorizes sanctions including disbarment and monetary penalties for violations.

A civil penalty imposed on a preparer who takes an understatement position without substantial authority or adequate disclosure, or who engages in willful or reckless conduct. Amounts vary with the preparer's conduct.

A 20 percent penalty on the portion of a tax underpayment attributable to negligence, substantial understatement, or valuation misstatement. It may be avoided with adequate disclosure and substantial authority.

Avoidance is arranging affairs within the law to reduce tax, such as using permitted deductions; evasion is an illegal act such as hiding income or falsifying documents. Only the latter carries criminal exposure.

A deferral provision allowing gain to be postponed when real property held for productive use or investment is exchanged for other real property of like kind, subject to identification and receipt timing rules.

A sale in which at least one payment is received after the tax year of disposition, allowing gain to be reported as payments are collected. It cannot be used for inventory sold on revolving credit.

An arrangement postponing receipt of compensation to a later year, often through a qualified plan or nonqualified plan. Tax deferral depends on meeting statutory election and funding rules.