Small Business Entity and Tax Glossary

A

Accountable plan

A written reimbursement arrangement that meets three IRS tests, so payments to employees for business expenses are not taxable wages. See accountable plan guide.

Accrual method

An accounting method that records income when earned and expenses when incurred, regardless of when cash moves. See cash vs accrual accounting.

Additional Medicare tax

An extra 0.9 percent Medicare tax on wages and self-employment income above statutory thresholds, reported separately from regular Medicare tax.

Articles of organization

The document filed with a state to create an LLC. Some states call it a certificate of formation. See how to form an LLC.

Asset purchase

A deal in which a buyer acquires selected assets of a business instead of its ownership interests. See asset vs stock purchases.

At-risk rules

Tax rules that limit deductible losses to the amount an owner has at risk in an activity, such as cash contributed and certain debt the owner is personally liable for.

B

Backup withholding

Tax withheld from certain payments when a payee fails to provide a valid taxpayer identification number. See information returns and 1099-NEC.

Basis

Your tax investment in an asset or ownership interest, used to compute gain, loss, and depreciation and to limit deductions. See tax basis basics.

Beneficial owner

An individual who owns or controls a company. The term appears in federal reporting rules and in bank due diligence. See beneficial ownership reporting.

Bonus depreciation

An additional first-year depreciation deduction available for qualifying property, with a percentage that has changed by legislation. See Section 179 and depreciation basics.

C

C-corporation

A corporation taxed as a separate entity. It pays corporate income tax, and shareholders are taxed again on dividends. See C-corps for small business.

Capital account

A record of a partner's or member's contributions, allocated income, and distributions in a partnership. It is different from tax basis. See multi-member LLC taxes.

Cash method

An accounting method that records income when received and expenses when paid. See cash vs accrual accounting.

Charging order

A court order giving a creditor of an LLC member the right to receive distributions the member would otherwise get, without direct control of the company. Its effect varies by state.

Commingling

Mixing personal and business funds, which weakens liability protection and complicates taxes. See separating personal and business finances.

D

DBA

Short for doing business as. A registered trade name that does not create a separate entity or liability protection. See DBAs and trade names.

Disregarded entity

An entity, often a single-member LLC, that the IRS ignores for income tax purposes, so its activity is reported by its owner. See single-member LLC taxes.

Distribution

A payment to an owner on account of ownership. In an S-corp it must be proportional to shares. See S-corp distributions explained.

Draw

Money an owner of a sole proprietorship, disregarded LLC, or partnership takes from the business. It is not an expense. See owner draws vs distributions.

E

EIN

Employer Identification Number, the IRS's nine-digit business tax ID. It is issued free by the IRS. See getting an EIN.

Estimated taxes

Quarterly payments toward income and self-employment tax for income that has no withholding. See estimated taxes guide.

F

FICA

The Social Security and Medicare payroll taxes paid by employees and employers. See payroll tax deposits and filings.

Foreign qualification

Registering an entity formed in one state to do business in another. See foreign qualification basics.

Franchise tax

A state tax on the privilege of being organized or doing business in the state. It is not related to franchised businesses. See annual reports and franchise taxes.

FUTA

Federal unemployment tax paid by employers, reported annually on Form 940.

G

Guaranteed payment

A payment to a partner for services or capital that does not depend on partnership profit. See multi-member LLC taxes.

H

Holding company

An entity whose main purpose is to own interests in other entities or assets. See holding company basics.

I

Independent contractor

A worker in business for themselves rather than an employee. Classification depends on the actual relationship. See contractor vs employee.

Installment sale

A sale in which at least one payment is received after the year of sale, allowing gain to be reported as payments arrive in many cases. See selling a business: tax basics.

K

K-1

The schedule that reports each owner's share of income, deductions, and credits from a partnership or S-corporation. See S-corp tax return guide.

L

LLC

Limited liability company, a state-law entity that generally separates owners from company debts. See LLC vs S-corp vs C-corp.

M

Material participation

A level of involvement in an activity that determines whether income or loss is treated as passive under tax rules.

N

Nexus

A connection between a business and a state that allows the state to require tax collection or filings. See sales tax nexus basics.

O

Operating agreement

The internal contract of an LLC that governs ownership, management, distributions, and exits. See operating agreement guide.

P

Pass-through entity

An entity whose income is reported on its owners' returns rather than taxed at the entity level, such as a partnership or S-corporation.

Pass-through entity tax

An elective state tax paid by the entity on behalf of owners, often used to work around the federal cap on state tax deductions. See pass-through entity tax.

Passive activity

An activity in which the owner does not materially participate, and most rental activities. Losses are limited. See tax basis basics.

Piercing the veil

A court remedy that holds owners personally liable when an entity is treated as their alter ego. See piercing the corporate veil.

Q

QBI

Qualified business income, the base for the Section 199A deduction. See QBI deduction.

QSBS

Qualified small business stock under Section 1202, which may allow exclusion of some gain on sale. See QSBS basics.

R

Reasonable compensation

The salary an S-corp must pay an owner who performs services, roughly what the business would pay someone else for the work. See S-corp reasonable compensation.

Registered agent

The person or company designated to receive legal papers for an entity in a state. See registered agent guide.

S

S-corporation

A corporation or LLC that has elected pass-through taxation under Subchapter S. See S-corp election guide.

Section 179

A provision allowing a business to deduct the cost of qualifying property in the year placed in service, subject to limits. See Section 179 and depreciation basics.

Self-employment tax

Social Security and Medicare tax paid by self-employed individuals on net earnings. See self-employment tax explained.

Series LLC

An LLC that can create internal series with separate assets and liabilities, authorized only in some states. See series LLC explained.

Shareholder loan

A loan between an owner and a corporation. Direct loans from an S-corp shareholder can create debt basis. See S-corp shareholder basis.

Specified service trade or business

A category of businesses, such as consulting, health, and law, whose owners can lose the QBI deduction at higher incomes. See QBI deduction.

Step-up in basis

An increase in the tax basis of an asset to its fair market value, such as on a purchase of assets or at an owner's death in many cases. See purchase price allocation.

Stock purchase

A deal in which a buyer acquires the ownership interests of an entity instead of its assets. See asset vs stock purchases.

T

Tax home

Your regular place of business for purposes of deducting travel away from home. See business meals and travel.

Trust fund taxes

Taxes withheld from employees' wages, held in trust for the government, for which responsible persons can be personally liable. See payroll tax deposits and filings.

W

W-8BEN

The form a foreign individual gives a U.S. payer to certify foreign status and claim any treaty benefits. See paying international contractors.

W-9

The form a U.S. payee gives a business to provide a taxpayer identification number. See information returns and 1099-NEC.

Wayfair

The 2018 Supreme Court decision allowing states to require remote sellers to collect sales tax based on economic activity. See sales tax nexus basics.