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The act of voluntarily and permanently giving up possession and use of property with the intention of ending ownership without transferring ownership to another person.
A reduction in the assessment of tax, penalty or interest when it is determined the assessment is incorrect.
Abuse of Law
The doctrine which allows the tax authorities to disregard a civil law form used by the taxpayer which has no commercial basis.
A semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution.
Accelerated Cost Recovery System (ACRS)
The name given to tax rules relating to recovering, through depreciation deductions, the cost of property used in a trade or business to produce income. ACRS applies to property first used before 1987.
Accelerated Death Benefits
Any amounts paid under a life insurance contract, prior to death, for an individual who is terminally or chronically ill.
Method of depreciation under which taxpayers may allocate larger depreciation deductions to the first year or first few years of useful business assets, such as plant and machinery.
A reimbursement or allowance arrangement that requires an employee to account to their employer for their business expenses within a reasonable time.
All documents and books used in the preparation of the tax return and all financial statements, including general ledger, subsidiary ledgers, sales slips, and invoices.
A list of the debts currently owed by a person or business, mainly for the purchase of services, inventory, and supplies.
A list of the money owed on current account to a creditor, which is kept in the normal course of the creditor's business and represents unsettled claims and transactions.
An accounting method whereby income and expense items are included in taxable income or expense as they are earned or incurred, rather than when they are received or paid.
Active Conduct of Trade or Business
Generally, to participate meaningfully in the management or operations of a trade or business.
Participation in a rental real estate activity in which the taxpayer owns at least 10% of the rental property and makes significant and bona fide management decisions, such as approving new tenants, deciding on rental terms, and approving expenditures.
A unit for performing a specific function that generates taxable income, such as a business entity.
Actual Expense Method
A method used to determine the deductible amount of the expenses of operating a vehicle (including a car, van, pickup, or panel truck) for business, charitable, medical, or moving purposes. This method is based on the actual costs incurred and the percentage of business use.
Ad Valorem Tax
A tax on goods or property expressed as a percentage of the sales price or assessed value.
Additional Child Tax Credit
A refundable credit for certain individuals who get less than the full amount of the Child Tax Credit.
The basis in property (usually its cost) increased or decreased by various events, such as improvements, depreciation, and casualty losses.
Adjusted Gross Income (AGI)
The amount of income that remains after certain adjustments to income are subtracted from the taxpayer's gross income.
Expenses that are not as easily associated with a specific function as are the direct costs of manufacturing and selling. It typically includes expenses of the headquarters office and accounting expenses.
An individual adopted by the taxpayer or placed by an authorized placement agency for adoption by the taxpayer. This child is considered a child of the taxpayer by blood.
Adoption Assistance Program
A written plan set up by an employer to provide adoption assistance to its employees.
Adoption Taxpayer Identification Number (ATIN)
A temporary nine-digit number issued by the IRS for a U.S. citizen or resident alien child being adopted when the adoptive parents cannot get a Social Security number for the child in time to file their tax return.
Advance Earned Income Credit
Advance payments of the Earned Income Credit paid to the taxpayer throughout the year in their paychecks.
Tax relief or exemption accorded to dividend distributions made by a resident subsidiary company to its parent company which owns a certain minimum percentage of shares, in order to mitigate double taxation of such dividends.
Term used to denote the adding together of the taxpayer's income from all sources in order to determine the applicable tax rate for income tax purposes.
This income can be 'alienated' when an entity (a company, trust or partnership) is interposed between the individual and the person paying for their services, so that the interposed entity derives the income rather than the individual.
Tips that an employer assigns an employee. These tips are in addition to tips the employee reported to the employer for the year.
Allocation of Income/Expenses
The apportionment or assignment of income or expense for various tax purpose, e.g., between permanent establishments in various jurisdictions.
Deduction or exemptions made in computing income taxes, inheritance and gift taxes and some forms of sales taxes.
Alternative Depreciation System (ADS)
The slower of the two depreciation systems under the Modified Accelerated Cost Recovery System.
Alternative Minimum Tax (AMT)
An additional tax a taxpayer may have to pay if they benefit from special tax treatment for some types of income, deductions, and expenses.
Alternative Minimum Taxable Income (AMTI)
The basis for calculating the alternative minimum tax exemption amount and the tentative minimum tax.
A method of recovering (deducting) certain capital costs in equal amounts over a period of 60 months or more.
The total value of all money and the fair market value of all property or services the seller received from a sale or exchange of a property, less expenses of sale. The amount realized also includes any of the seller's liabilities or any liabilities (assumed by the buyer) to which the transferred property is subject.
The amount of gain or loss realized from the sale or exchange of property that is included in or deducted from gross income for tax purposes.
A person from whom an individual descended. For example, an individual's great grandmother and great grandfather are their ancestors.
The total of all contributions (not including rollovers) for the year to an individual participant's retirement plan account plus forfeitures allocated to that account.
The annual payment of a straight-life annuity (with no extra benefits) under a plan without employee contributions or rollovers.
A contract for a series of fixed or variable payments made at regular intervals over a period of more than one full year.
Annuity Starting Date
The first day of the first period for which an individual should receive a plan payment or, if after that day, the date the plan's obligations became fixed.
Process of buying a commodity (which may include currency or securities) and simultaneously selling it in another market to profit from price differentials.
Process of entering into a tax motivated transaction (i.e. to obtain profit from the application of tax rules).
Term used for the determination of a dispute by the judgment of one or more persons, called arbitrators, who are chosen by the parties and who normally do not belong to a normal court of competent jurisdiction.
Arm's Length Standard
The IRS requires taxpayers to adopt an arm's length standard when making business arrangements with another controlled company. This means that the price charged or paid by a related party must be the same price charged or paid by an unrelated party under the same (or similar) circumstances.
Rules that create ownership by attributing stock to one party even though the shares are legally owned by another party; often called constructive ownership of stock.
Authorized IRS e-file Provider
A tax professional or business that is accepted to participate in the IRS e-file program.
Authorized Placement Agency
Any person, state, or local government agency, tax-exempt organization licensed by a state, or court authorized by state law to place children for legal adoption or in foster care.
Away From Home
The status of an individual when their job requires them to travel away from their tax home longer than an ordinary workday and they need to sleep or rest before they can continue working.
A loss from the worthlessness of a debt. A debt becomes worthless when the surrounding facts and circumstances indicate there's no reasonable expectation that the debt will be repaid. To show that a debt is worthless, you must establish that you've taken reasonable steps to collect the debt.
The amount owed to the IRS after subtracting total tax payments from the total tax liability on a tax return.
Statement of the financial position of a business as of a particular date. The statement will show the business's assets in one column and its liabilities and owner's equity in another column.
Bank Secrecy Act (BSA)
U.S. legislation aimed at preventing criminals from using financial institutions to hide or launder money. The BSA requires financial institutions to: Keep records of cash purchases of negotiable instruments File reports of cash transactions exceeding $10,000 (daily aggregate amount) Report suspicious activity that might signify money laundering, tax evasion, or other criminal activities The BSA was passed in 1970 as the first laws to fight money laundering in the United States.
Any person or an organization with members or clients that contract with each other (or with the barter exchange), who jointly trades or barters property or services.
The amount of an individual's investment in property for tax purposes. Term used in capital gains tax legislation to denote the cost of an asset to an owner.
Stocks, bonds, etc. in which ownership can be transferred from one holder to another without registration of the transaction by the issuing company, that is, title passes with delivery.
In considering whether a company may be allowed to deduct, as an expense, payments made to a related company in a multinational group on account of expenses incurred by that related company in providing intra-group services, tax authorities would refuse a deduction unless a real benefit had been conferred on the company claiming the deduction.
Benefits in Kind
Term which refers to earnings, usually from employment, other than in cash, as part of compensation for services rendered.
Interest-bearing debt obligation to a government or entrepreneur. The rate of interest is usually fixed.
The value of an individual asset as recorded in the accounting records of a taxpayer, calculated as actual cost less allowances for any depreciation.
Office or other unit of business located at a different location from the main office or headquarters. It is not a separate legal entity.
Tax imposed on branches of foreign companies in addition to the normal corporate income tax on the branch's income. This is equivalent to the tax on dividends which would be due if the branch had been a subsidiary (see: subsidiary company) of the foreign company and had distributed its profit as dividends.
Two or more companies which are owned and controlled by the same shareholders.
Business Bad Debt
A business bad debt that is either of the following: created or acquired in the taxpayer's trade or business or closely related to the taxpayer's trade or business when it became partly or totally worthless (a debt is closely related to the taxpayer's trade or business if the taxpayer's primary motive for incurring the debt is business related).
Business Books and Records
The intangible value of technical manuals; training manuals or programs; data files; accounting or inventory control systems; customer lists; subscription lists; insurance expirations; patient or client files; and lists of newspaper, magazine, radio, and television advertisers.
Costs that do not have to be capitalized or included in the cost of goods sold. To be deductible, business expenses must be both ordinary and necessary.
Business Purpose Test
Test used as a weapon against tax avoidance schemes. Artificial schemes which create circumstances under which no tax or minimal tax is levied may be disregarded if they do not serve a "business purpose".
One of four quarters of a calendar year: January through March, April through June, July through September, or October through December.
The right to buy a state number of shares of stock at a predetermined price (the strike price) before a specified date.
Generally, everything an individual owns and uses for personal purposes, pleasure, or investment.
Expenditure on improvement rather than repair. Where expenditure is more closely connected with the business income-earning structure than its income earning capacity, it is capital expenditure.
Capital Gain Distributions
Amounts paid to an individual or credited to their account by regulated investment companies and real estate investment trusts (REITs). These amounts are also known as capital gain dividends.
To recover a cost over a period of years through deductions for depreciation, amortization, or depletion, and adding the cost to the basis of the property to which it relates.
The unpaid interest on a loan that the lender adds to the outstanding principal balance of the loan.
Carryback and Carryforward
A process by which the deductions or credits of one taxable year that cannot be used to reduce tax liability in that year are applied against a tax liability in subsequent years (carryforward) or previous years (carryback).
The accounting method which recognizes income and deductions when money is received or paid.
Cash Settlement Option
Any option that, upon exercise, is settled by paying the owner of the option cash or other property and not the actual property underlying the option.
Generally, wages paid by cash, checks, money orders, or equivalent means. Cash wages do not include the value of food, lodging, clothing, or other such noncash items given to an employee.
The damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
A donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting anything of equal value.
A payment that is specifically designated as child support or treated as specifically designated as child support under a divorce or separation instrument.
Chronically Ill Individual
An individual who has been certified by a licensed health care practitioner within the previous 12 months as one of the following: (1)an individual who is unable, for at least 90 days, to perform at least two activities of daily living without substantial assistance from another individual due to loss of functional capacity (activities of daily living are eating, toileting, transferring, bathing, dressing, and continence), or (2) an individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
An employee (other than a minister or member of a religious order) of a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare taxes.
Civil Service Annuity
Annuity benefits that are paid primarily under the Civil Service Retirement System or the Federal Employees Retirement System.
The number of years that establishes the property class and the recovery period for most types of property for the General Depreciation System and the Alternative Depreciation System under the Modified Accelerated Cost Recovery System.
Closely Held Corporation
Generally, a corporation that, at any time during the last half of the tax year, has more than 50% in value of its outstanding stock directly or indirectly owned by five or fewer people. This type of corporation is generally not a personal service corporation.
Two or more loans made to the same borrower that are treated by both the lender and the borrower as one loan.
Any work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage.
Any area the president of the United States designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat. An area usually becomes a combat zone and ceases to be a combat zone on the dates the President designates by Executive Order.
Contracts, traded on recognized futures markets, in which sellers promise to deliver a given commodity by a certain date at a predetermined price.
A type of share in the ownership of a company that usually provides the right to vote on decisions relating to the company's management. Shareholders are entitled to receive distributions of the company's profit in the form of dividends.
An individual who performs services for an employer in return for compensation. An employee is subject to the control of the employer regarding what work is done and how, when, and where it is done.
A marriage in which a man and woman are considered to be married even without a license or a formal ceremony. Only certain states recognize common-law marriages.
Income earned while married and domiciled in a community property state that is allocated to both spouses, regardless of which spouse actually earned it.
Community Property Laws
Laws that affect what income is reported on the federal income tax returns of married taxpayers who live in a community property state and file separate returns.
Travel between a personal home and work or job site within the area of an individual's tax home.
Often used to mean a separate legal entity (a corporation) organized to perform an activity, business or industrial enterprise. Sometimes it has a broader meaning to mean individual or collective enterprises seeking profit.
Comparison of controlled transaction conditions with conditions prevailing in transactions between independent enterprises (uncontrolled transactions). Controlled and uncontrolled transactions are comparable if none of the differences between the transactions could materially affect the factor being examined in the methodology (e.g. price or margin), or if reasonably accurate adjustments can be made to eliminate the material effects of any such differences.
Comparable Profit Method (CPM)
Under US regulations CPM is a method to determine an arm's length consideration for transfers of intangible property. If the reported operating income of the tested party is not within a certain range, an adjustment will be made. In effect this method requires a comparison of the operating income that results from the consideration actually charged in a controlled transfer with the operating income of similar taxpayers that are uncontrolled.
Comparable Uncontrolled Transaction (CUT) Method
A transfer pricing methodology used in the US, which determines an arm's length royalty rate for an intangible by reference to uncontrolled transfers of comparable intangible property under comparable circumstances.
An adjustment in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer's opinion, an arm's length price for a controlled transaction, even though this price differs from the amount actually charged between the associated enterprises. This adjustment would be made before the tax return is filed.
Money or other benefits given or received as payment for work or service. Compensation can include wages, salaries, bonuses, prizes, and tips an employee receives.
Competent Authority (CA)
Forum to resolve disputes arising from the application and/or interpretation of a double tax treaty. Both treaty countries appoint a representative (frequently the Ministry of Finance or its authorized representative) as the CA to assist aggrieved taxpayers by acting as the official liaison with the foreign CA. The CA is generally indicated in the definitions sections of tax treaties.
The process by which private property owned by a taxpayer is legally taken for public use without their consent.
Company set up in connection with a tax avoidance scheme, whereby income is paid by a company to the conduit and then redistributed by that company to its shareholders as dividends, interest, royalties, etc.
An IRA account used as a holding account for eligible rollover distributions from an employer plan that can be rolled over to a new employer plan later.
Consent to Assessment
A written agreement between a taxpayer and the IRS that extends the statutory period of limitations (which is usually three years) to allow additional time, when it is necessary, to fairly resolve a tax examination. These agreements are called "consents" and apply to all kinds of taxes except estate tax.
Anything of value, including property, given in return for a promise or performance by another party to form a contract.
Consolidated Tax Return
A combined tax return in the name of the parent company filed by companies organized as a group.
Association of business enterprises, whether individuals, partnerships or companies, operating together on a temporary basis for some specific venture.
A variety of payments whether in cash or in kind made by companies to shareholders or associated persons, which are not expressed as dividends, may nevertheless be regarded by the tax law as distributions of profits and treated for tax purposes as if they were dividends.
A taxpayer may be considered to own property or stock which he only indirectly owns.
The unqualified, vested right to receive immediate income or property. The right may be credited to an account, set apart, or otherwise made available so that it may be drawn upon at any time.
Tax generally intended to fall on the ultimate consumption of goods and services such as sales tax.
A manufacturer, in most cases, located in a low-cost jurisdiction, which has a license to use an intangible property developed by its parent company. The manufacturer uses the intangible property to produce tangible property which is then resold to the parent for distribution to ultimate customers.
The selling price plus mortgages, debts, and other liabilities assumed or taken by the buyer that are in excess of the seller's adjusted basis. This amount is the total of all principal payments a seller is scheduled to receive on the installment sale, including the down payment and each later payment of principal on any debt that the buyer assumed. It also includes payments the seller is considered to receive. This does not include interest.
The amount put into a retirement plan for the individuals participating in the plan, including self-employed individuals.
The capacity of one person to ensure that another person acts in accordance with the first person's wishes, or the exercise of that capacity. The exercise of control by one person over another could enable individuals and corporations to avoid or reduce their tax liability. A company is usually regarded as controlling another company if it holds more than 50% of the latter company's voting shares. However, the definitions vary according to country and situation.
Controlled Foreign Companies (CFC)
Companies, usually located in low tax jurisdictions, that are controlled by a resident shareholder. CFC legislation is usually designed to combat the sheltering of profits in companies resident in low- or no-tax jurisdictions. An essential feature of such regimes is that they attribute a proportion of the income sheltered in such companies to the shareholder resident in the country concerned. Generally, only certain types of income fall within the scope of CFC legislation, i.e. passive income such as dividends, interest and royalties.
Transactions between two enterprises that are associated enterprises with respect to each other.
A method established under the Modified Accelerated Cost Recovery System (MACRS) to determine when the recovery period begins and ends. The convention affects a taxpayer's depreciation deduction for the year they place their property in service and the year they dispose of it.
Enterprise whose only purpose is to coordinate the activities of affiliated companies, to do research or to conduct support activities for the benefit of such corporations.
As a corporation is a separate legal entity, and shareholders have an interest in the company rather than in its assets, the corporate veil is used to describe the inability to look behind the legal entity and attribute the actions assets, debts, and liabilities of a company to those standing behind it, notably the shareholders. Courts may sometimes be able to “pierce” (look through) the corporate veil to make an attribution to the underlying person or persons.
In technical terms, it means a legal entity chartered by a relevant government and separate and distinct from the persons who own it. However, it is now commonly used as another way of referring to a company.
An adjustment to the tax liability of the associated enterprise in a second jurisdiction made by the tax administration of that jurisdiction, corresponding to a primary adjustment made by the tax administration in a first tax jurisdiction, so that the allocation of profits by the two jurisdictions is consistent.
Cost Contribution Arrangement (CCA)
A CCA is a framework agreed among enterprises to share the costs and risks of developing, producing, or obtaining assets, services, or rights, and to determine the nature and extent of the interests of each participant in the result of the activity of developing, producing, or obtaining those assets, services, or rights.
Contribution of an affiliate company to the general research and development (R&D) costs of another affiliate or group member, in proportion to its turnover or some other criterion.
Cost of Goods Sold
Inventory at the beginning of the year, plus purchases (reduced by cost of items withdrawn for the taxpayer's personal use), plus cost of labor (not including amounts the taxpayer paid to themselves), plus materials and supplies, plus other costs, minus inventory at the end of the year.
A markup that is measured by reference to margins computed after the direct and indirect costs incurred by a supplier of property or services in a transaction.
A transfer pricing method using the costs incurred by the supplier of property (or services) in a controlled transaction. An appropriate cost-plus markup is added to this cost, to make an appropriate profit considering the functions performed (considering assets used and risks assumed) and the market conditions. What is arrived at after adding the cost plus mark up to the above costs may be regarded as an arm's length price of the original controlled transaction.
Coverdell Education Savings Account (ESA)
A trust or custodial savings account that is set up to pay the qualified education expenses of a designated beneficiary. Contributions are not deductible, but earnings may be tax-free.
Covered Disaster Area
A presidentially declared disaster area in which the IRS has decided to postpone tax-related filing deadlines for up to one year.
The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet.
The cash, accounts receivable, inventory, and other assets that are likely to be converted into cash, sold, exchanged, or expensed in the normal course of business, usually within a year.
The parent who has custody of a child for the greater part of the year or for the entire year.
An individual or organization, such as a bank or trust company, that is responsible for overseeing and safeguarding assets on behalf of the beneficiary or owner of the assets (for example, a minor).
The value associated with a customer base, a circulation base, an undeveloped market or market growth, insurance in force, a mortgage servicing contract, an investment management contract, or any other relationship with customers involving the future provision of goods or services.
The amount received (other than worker's compensation) through prosecution of a legal suit or action based on tort or tort-type rights, or through a settlement agreement entered into in lieu of such prosecution.
Date of Record
The date an individual must be listed as the owner of shares in a company's records to be the recipient of the dividends to be paid.
Phrase used in connection with circumstances in which the full rigor of the tax law is not enforced because of the small amount or minor breach which may be involved, particularly in the context of under-assessed or underpaid tax which are not pursued on "de minimis" grounds.
Interest-bearing bond which is not secured by any specific property, usually issued by a corporation or government to the public.
Funds obtained through several types of loans which normally comprehend debentures and bonds bearing fixed interest.
Transferring a bad debt to a group company located in a higher-tax rate country in order to write off the debt in that country.
A written promise to repay a debt, such as a bill, bond, banker's acceptance, note, certificate of deposit, or commercial paper.
Relationship of total debt of a company to its ordinary share capital. If a corporate debt is disproportionately high in comparison with its equity, the debt may be recharacterized as equity, resulting in a disallowance of the interest deduction and taxation of the funds as dividends.
Declining Balance Method
A method of calculating the depreciation for property that applies the same depreciation rate each year to the adjusted basis of the property.
Deduction denotes, in an income tax context, an item which is subtracted (deducted) in arriving at, and which therefore reduces, taxable income.
If a member of a multinational enterprise (MNE) receives an interest-free loan from an affiliated company, the tax authorities of the lender's country may readjust the lender's profits by adding an amount equal to the interest which would have been payable on the loan had it been made at arm's length.
A qualified employer retirement plan that maintains a separate account or annuity to receive voluntary employee contributions. If this plan or annuity otherwise meets the requirements of an IRA, it is subject only to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA.
The failure of a debtor to make timely payments of interest and principal amounts as they come due or to meet other provisions of a bond, mortgage, lease, or other contract.
The voluntary contribution an employer deducts from an employee's pay that is not subject to income tax. Also called elective deferral or pre-tax contributions.
The excess of a taxpayer's correct tax liability for the taxable year over the amount of taxes previously paid for that year.
An individual, other than the taxpayer or their spouse, who entitles the taxpayer to claim an exemption.
Dependent Care Benefits
Amounts an employer pays directly to an employee or the employee's care provider for the care of the employee's qualifying dependent while the employee works, or the fair market value of care in a daycare facility provided or sponsored by the employer.
The using up of natural resources by mining, quarrying, drilling, or felling, for which a deduction allows an owner or operator to account for the reduction of a product's reserves.
An amount that can be deducted annually that allows the taxpayer to recover the cost or other basis of certain property over the time the property is used in trade or business. It is an allowance for the wear and tear, age, deterioration, or obsolescence of the property.
These are financial instruments whose values are linked to or depend on the value of a primary (underlying) asset, e.g. debt assets, liabilities and equity securities, commodities, or currency. The primary types of derivatives include forward contracts, futures, options, and swaps.
A person who descended from an individual. For example, an individual's great grandchild is their descendent.
Cost identified with a particular transaction, such as raw materials, components and goods, wages and other processing expenses.
The transfer of a distribution made by the administrator of the distributing plan directly from one qualified plan to another qualified plan (if permitted) or traditional IRA.
An individual who can show proof that they cannot engage in a substantial gainful activity because of their physical or mental condition. A physician must determine that their condition can be expected to result in death or to be of long-standing and indefinite duration.
The difference between the amount paid for an asset and the fair market value or stated face value of that asset.
An area for which the poverty rate or other conditions cause certain tax incentives to apply.
Dividend Reinvestment Plan
A plan that lets an investor choose to use their dividends to buy more shares of stock in a corporation through an agent instead of receiving the dividends in cash. The investor must still report the fair market value of the dividends on their tax return.
Distributions of money, stock, or other property paid to shareholders by a corporation. Dividends may also be received through a partnership, estate, trust, or association that is taxed as a corporation.
Divorce or Separation Instrument
A divorce or separate maintenance decree or a written instrument that happens as a result of that decree, a written separation agreement, or a decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement).
Written records that establish certain facts; for example, documents that support a tax deduction or an expense.
Corporation which is organized or has its place of effective management in a country.
The taxpayer's permanent legal home where they intend to live for an indefinite or unlimited period and to which they intend to return when absent.
The term used to indicate the possibility for dual resident companies to deduct the same expenses in two jurisdictions.
An individual who is a resident alien for part of the tax year and a nonresident alien for part of the year.
The requirement that a paid preparer must show a serious and earnest effort to obtain accurate and complete information.
Zone usually located next to an international port or airport where imported goods may be unloaded, stored, and reshipped without payment of customs duties or other types of indirect taxes, provided the goods are not imported.
Property, such as a house, an apartment, a condominium, a mobile home, a boat, a vacation home, or another similar property that has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. It does not include a unit in a hotel, motel, inn, or other establishment where more than half the units are used on a transient basis.
An amount distributed from the individual's pension, annuity, or traditional IRA account before they reach age 59 1/2.
Income received for services, such as wages, salaries, tips, net earnings from self-employment, and professional fees, and any other income received as pay for work actually performed. Earned income also includes taxable scholarship and fellowship grants.
Earned Income Credit (EIC)
A refundable credit for certain individuals who work and have earned income under a certain amount based on their filing status and the number of qualifying children, if any.
Earnings and Profits (E&P)
A term referring to the economic capacity of a corporation to make a distribution to shareholders that is not a return of capital. Such a distribution would constitute a taxable dividend to the shareholder to the extent of current and accumulated earnings and profit
Earnings Before Taxes
Sales revenue less cost of sales, operating expenses, and interest, before taxes have been paid.
Practice of reducing the taxable income of a corporation by paying excessive amounts of interest to related third parties.
A legal right to use someone else's land for a particular purpose, such as for utilities, for a right-of-way, or for recreational purposes. Ownership is not transferred.
Education Savings Bond Program
A program that allows a taxpayer who paid qualified higher educational expenses during the year to exclude from income all or part of the interest they receive during the same year from redeeming Series EE savings bonds and Series I savings bonds issued after 1989.
Effective Tax Rate
The rate at which a taxpayer would be taxed if his tax liability were taxed at a constant rate rather than progressively. This rate is computed by determining what percentage the taxpayer’s tax liability is of his total taxable income.
Effectively Connected Income (ECI)
Non-resident alien individuals and foreign corporations engaged in trade or business within the US are subject to US income tax on income, from sources both within and outside the US, which is "effectively connected" with the conduct of the trade or business within the US. Income is effectively connected if it is derived from assets which are used in or held for use in the US, and the activities of the US business were a material factor in the realization of the income.
The voluntary contribution an employer deducts from an employee's pay that is not subject to tax. Also called deferred compensation or pre-tax contributions.
Eligible Educational Institution
Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. These institutions include nearly all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.
Eligible Foster Child
An individual who is placed by an authorized placement agency, or by judgment, decree, or other order of any competent jurisdiction.
An individual who is hired to work for a person, an organization, or a company in return for compensation and who is subject to the will and control of the employer regarding what work is done and how and when to do it.
Employee Profit Sharing
The system under which the employees of an enterprise are entitled by employment contract or by law to a share of the profits made by the enterprise.
Employee Stock Options
An opportunity for employees to purchase stock (shares) in the company they work for, often at a discount on the market value. It is provided as an incentive to stay with the employer until the options vest.
Employer Identification Number (EIN)
A nine-digit number assigned by the IRS to an employer for tax filing and reporting purposes.
The income of a professional entertainer, e.g., a musician, actor or other artiste, or athlete is treated differently from the income of people carrying on other independent professions.
Expenses incurred while participating in an activity that provides entertainment, amusement, or recreation.
In general, for tax purposes, an organization, person, or party possesses separate existence. Options include corporations, partnerships, estates, and trusts.
Tax imposed for environmental reasons, e.g. to provide an incentive to reduce certain emissions to an optimal level or taxes on environmentally harmful products.
A general principle of taxation which requires that taxpayers pay an equal amount of tax if their circumstances are equal.
An equitable interest in an asset is the interest of the beneficial owner; this may or may not be the same person as the legal owner.
1. The extent of a person's beneficial ownership of a particular asset. This is equivalent to the value of the asset minus the liability to which the asset is subject. 2. Paid-in capital plus retained earnings in a corporation 3. The ownership interest possessed by shareholders in a corporation - stock as opposed to bonds.
A method of financing a business where money is received by the issuance of shares in the enterprise.
Any deduction, credit, or expense item that is incorrectly stated on a tax return and any income item that is not properly reported on a tax return.
All that a person owns, whether real property or movable property, for instance, the estate one leaves at death.
The estimated assessment procedure is used when the taxpayer failed or is late in returning his tax declaration. The tax authority unilaterally assesses the estimated taxes owed by the taxpayer. The estimated assessment procedure puts the burden of proof on the taxpayer.
Estimated tax is the method used to prepay tax on income that is not subject to withholding.
The date that determines whether the buyer or the seller of stock receives the next dividend distribution a company pays. This date is usually two business days before the date of record.
The checking of a taxpayer's tax return, accounts, self-assessment calculations, etc. The process may or may not include an audit of the taxpayer's own books.
The difference between the minimum amount required to be distributed from a qualified retirement plan and the amount that was actually distributed.
Term used to describe income, which is exempt, i.e. not included in the calculation of gross income for tax purposes.
An amount that a taxpayer can claim for themselves, their spouse, and their eligible dependents.
Rules under which a taxpayer continues to be subject to tax when he relinquishes his residence or his citizenship in order to avoid tax.
Costs that are currently deductible, as opposed to capital expenditures, which may not be currently deducted but must be depreciated or amortized over the useful life of the property.
Tax levied on exports of basic commodities entering world trade, such as rubber, copper, palm oil, tea, cocoa, and coffee.
Financial transaction whereby an enterprise sells its debt-claims to a third party in order to obtain cash (although less than the full amount of the debt). The third party then assumes responsibility for the administration and collection of the debt on the due date for its own account.
Fair Market Value (FMV)
The price that property would sell for on the open market or the price that would be agreed upon between a willing buyer and willing seller, with neither being required to buy or sell and both having reasonable knowledge of the relevant facts.
Fair Rental Price
Generally, an amount that an individual (who is not related to the property owner) is willing to pay to rent property. If the rental price is substantially less than for similar properties in the same area, it is not considered a fair rental price.
Fair Rental Value
The amount an individual could reasonably expect to receive from a stranger for lodging. Fair rental value includes rent or taxes, interest, depreciation, pain, insurance, utilities, or the cost of furniture and appliances. In some cases, fair rental value may be equal to the rent paid.
A trade or business involving the cultivation of land; raising or harvesting any agricultural or horticultural commodity; operating a nursery or sod farm; raising or harvesting trees bearing fruit, nuts, or other crops; or raising or harvesting ornamental trees. Farming businesses also include the raising, shearing, feeding, caring for, training, and management of animals.
A daily publication by the U.S government that prints the regulations of the various governmental agencies.
Generally, an amount paid for the benefit of an individual to aid in the pursuit of study or research.
Method of valuing inventory based on "first in, first out", where goods or materials purchased first are regarded as those which are sold first.
Factors that determine whether a taxpayer must file a federal individual income tax return.
The tax return status used to determine a taxpayer's filing requirements, standard deduction, applicable tax, and whether the taxpayer is allowed to claim certain other deductions and credits.
Lease where the lessor is considered only as a financier. The lessee is regarded as the owner of the leased assets.
Report which contains all the financial information about a company. The report consists of a balance sheet, income statement and may include other information as well.
The makeup of the right-hand side of a company's balance sheet, which includes all the ways its assets are financed.
The inability of an individual to manage their financial affairs because of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
"Looking through" an entity and attributing profits and losses directly to the entity's members. The profits of certain forms of enterprises are taxed in the hands of the members rather than at the level of the enterprise. Often occurs in the case of a partnership for example.
Assets that are held by an enterprise either continuously or for an extended period, more than one year.
Income which does not fluctuate over a period, such as interest on bonds and debentures, or dividends from preference shares as opposed to dividend income from ordinary shares.
A tax applied at the same rate to all levels of income. It is often discussed as an alternative to the progressive tax.
A legal business entity that passes any income it makes straight to its owners, shareholders, or investors. As a result, only these individuals, and not the entity itself, are taxed on the revenues.
A procedure by which the lender either takes title to or forces the sale of the borrower's property in satisfaction of a debt.
Usually any territory (including the air space and territorial waters) under the sovereignty of a government other than that of the United States, including the seabed and subsoil of those submarine areas adjacent to the territorial waters of a foreign country and over which the foreign country has exclusive rights under internationals law to explore and exploit the natural resources.
Foreign Currency Futures
Exchange traded contract for the delivery of a standardized amount of foreign currency on a specific future date. The price for the foreign currency is agreed on the day the contract is bought or sold. Unlike forward contracts, futures are tradable, reflecting the standardization of contract size, specification and delivery date.
Foreign Currency Swap
An agreement under which two or more parties agree to exchange the specified amount of two different currencies for a defined period. Over the term of the agreement, the parties exchange fixed or floating rate interest payments in their swapped currencies.
Foreign Exchange Tax
Special tax imposed on transactions involving sales of foreign exchange by domestic banking institutions and authorized exchange brokers.
Foreign Tax Credit
A method of relieving international double taxation. If income received from abroad is subject to tax in the recipient's country, any foreign tax on that income may be credited against the domestic tax on that income. The theory is that this means foreign and domestic earnings of an entity will as far as possible be similarly taxed, although usually the credit allowed is limited to the amount of domestic tax, with no carry over if tax is higher abroad.
Foreign Tax Relief
Relief from domestic tax on income from abroad which has already suffered foreign tax. Generally speaking, two approaches are taken to foreign tax relief, i.e. the credit method or the exemption method.
income realized from countries outside the country of residence of the taxpayer.
Contract for the delivery of an amount of asset (e.g. foreign currency, securities, commodities) on a specific future date.
Nearly all states in the US levy an annual franchise tax on resident and non-resident corporations for the privilege of the right to do business in that state.
Tax fraud is a form of deliberate evasion of tax which is punishable under criminal law. The term includes situations in which deliberately false statements are submitted, fake documents are produced, etc.
The term used to describe the practice of interposing a third party in a transaction to circumvent transfer pricing legislation.
An individual attending an educational institution who meets the definition of full-time attendance for that institution.
An analysis of the functions performed (considering assets used and risks assumed) by associated enterprises in controlled transactions and by independent enterprises in comparable uncontrolled transactions.
Generally Accepted Accounting Principles are the rules and practices required to be followed in keeping financial records and books of accounts.
Term universally used in the context of a company's debt/equity ratio. A company is highly geared if the ratio of debt to equity is high. Sometimes referred to as capital gearing or leveraging.
The method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities).
General Sales Tax
A tax imposed at one rate with respect to the retail sale of a broad range of classes of items.
Tax imposed to prevent the avoidance of transfer tax (i.e. estate tax and gift tax) over successive generations.
A debt that arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable amount of money.
Gift Causa Mortis
A transfer of property by a person who faces impending death. The donee thereby becomes the owner of the property, but on the condition that the gift is revoked if the donor does not die.
Gift Inter Vivos
A gratuitous transfer of property made during the transferor's (donor's) lifetime. In many countries the gratuitous transfer of property is subject to a gift tax.
A risk-management strategy to balance positions of different business units or with unrelated third parties.
Global Income Tax
Income tax that aggregate income from all sources at the individual (or family unit) level. The income is then taxed at a single progressive rate.
Global Method or Global Formulary Apportionment Method
Under the global method, the profits of each member of a multinational enterprise (MNE) are not calculated on the basis of arm's length dealings, but rather the total profit of the enterprise is allocated to the members of the multinational enterprise based on, for example, the turnover of each member, the expenses incurred by each member or the labor cost of each member.
Term used to describe transactions carried out by, inter alia, investment banks and securities dealers, involving financial instruments, financial services and financial goods. It is also known as 24-hour trading since the transactions are carried out continuously during a day in financial markets worldwide.
"Good faith" denotes a state of mind, whereby a person honestly and genuinely believes that certain facts or circumstances are as he says they are.
Goods And Sales Tax VAT
Multi-stage sales tax levied on purchases (and lessees). Sellers (and lessors) are responsible for collection.
The intangible value of a business based on expected continued customer patronage due to its name, reputation, location, or any other factor.
1981 report submitted to the US Treasury, entitled "Tax Havens and Their Use by United States Taxpayers - An Overview"; it explains the use of US taxpayers make of tax havens, existing anti-abuse measures and proposals for measures to counter such activities.
The period following the due date of taxes during which legal action for recovery of delinquent taxes will not be instituted and interest will not commence to run.
System where the rate of tax increases on marginal amounts as the amount of taxable income rises. Synonym for progressive rate.
Clause temporarily preserving legislation which exists at the time a law is modified or a (tax) treaty is concluded (or modified).
Entry document issued by the US immigration and Naturalization Service (INS) that permits foreign nationals to live permanently in the US and undertake employment.
Green Card Test
A test in the US to determine residence of an alien individual, i.e. an alien is considered resident if at any time during the calendar year he is a lawful permanent resident of the US under the immigration laws.
Gross Distribution (Retirement)
The total amount distributed from a retirement account before income tax and other deductions are withheld.
All income received in the form of money, goods, property, and services that is not exempt from tax. Gross income includes earned income and unearned income.
Gross Profit Percentage
A certain percentage of each installment sale payment (after subtracting interest) that is reported as a gain from the sale.
Gross Profit Ratio
Ratio of gross profit to the sales of a business or, alternatively, to the adjusted purchases or "goods consumed" during the accounting period.
Add back the amount of tax which has been paid to the value of property or other income received. The term includes the process by which corporation add credits (e.g. imputation credits or foreign tax credits) received to net income received before calculating their tax liabilities.
Term used to describe the tax treatment where the profits and losses of associated companies may be grouped together and, in effect, be treated as the aggregated profits of a single enterprise (sometimes called a "fiscal unity").
A person who guarantees, endorses, or provides indemnity agreements with respect to debts owed to others.
Discretionary power of the tax authorities to mitigate any harsh results of the tax law.
Head Office Expenses
Where an enterprise with its head office in one country operates through a branch or other permanent establishment in another country, some expenses incurred by the head office, e.g. for general management and administrative expenses or the cost of specific services provided to the permanent establishment, may be deducted in computing the taxable profits of the permanent establishment.
A Transaction where a person tries to protect himself against price, interest rate or foreign exchange rate fluctuations, for example, by buying or selling commodities or currencies using derivative contracts such as forwards, futures, options and swaps.
Reserves which are not disclosed on the balance sheet of an enterprise, either by overvaluing debts or undervaluing assets.
Highly Compensated Individual
An individual who meets one of the following criteria: (1) owned more than 5% of the capital or profits in a business at any time during the current or prior year, or (2) received compensation during the prior year that was more than an annual predetermined amount and in the top 20% compared to other employees' compensation.
Amount expended in obtaining an asset at the time of acquisition, i.e. the purchase price and associated costs.
An activity that is carried on for personal pleasure or recreation and is not entered into with the intention of making a profit.
The length of time investment property has been held. Generally, the time between the date of purchase (or acquisition) and the date of sale (or disposition). The holding period for stocks and securities begins the day after the trade date and ends the day of sale.
Home Mortgage Interest
Any interest an individual pays on a loan secured by their home (either their main home or a second home). The loan may be a mortgage to buy their home, a second mortgage, a line of credit, or a home equity loan.
Doctrine which holds that similarly situated taxpayers should receive similar tax treatment, e.g. taxpayers who earn the same amount of income or capital should be accorded equal treatment.
House Ways And Means Committee
The committee of the US House of Representatives that introduces most tax provisions.
Ordinary and usual services done in and around the taxpayer's home that are necessary to run their home, including the services of a housekeeper, maid, or cook, but not including the services of a chauffer, bartender, or gardener.
The type of poll tax levied on inhabited dwellings or huts at an early stage in the development of an economy when it is not feasible to introduce an income tax.
Hybrid Accounting Methods
Term which refers to the situation where a taxpayer used a combination of accounting methods (such as accruals basis accounting or cash basis accounting) for different items of income.
A financial instrument which has the characteristics of more than one type of instrument, i.e. a swap plus an option.
An entity that is characterized differently in two or more jurisdictions, for example, an entity that is treated as a partnership in one jurisdiction and as a corporation in another.
Also known as real property, immovable property comprises land, houses and buildings.
The term "impost" means tax and refers particularly to a duty on imported goods and to clarification (by customs) of (imported) goods to assess the proper (import) taxes
Property maintenance or enhancement that adds to the value of the property, lengthens its useful life, or changes it so it an be used in a new way.
The system under which at least part of the tax paid by a company on its profits is credited against the tax liability of shareholders in receipt of distributions paid by the company out of those profits.
The economic benefit a taxpayer obtains through performance of self-provided services or through the use of self-owned property.
In a mortgage that states an insufficient interest rate, tax law will impute a higher rate and a lower principal, which will increase taxes on the receipt of payment.
Incentive Stock Option (ISO)
An option to purchase stock that is granted to an employee for any reason connected with their employment by a corporation. This option is granted by the employer corporation or its parent or subsidiary corporation and applies to an employee's purchase of stock of any such corporation.
Incidence of Tax
The person who bears the tax burden in economic sense, which could be different from the person paying the tax.
Expenses or costs that are not material expenses incurred while on business or that do not add substantial value to a gift.
Income in Respect of the Decedent
Income received after the decedent's death that cannot be included in the decedent's income tax return but that would have been attributable to the decedent had they lived.
Arrangements, the essential feature of which is that income, which would have been taxed at a higher rate in the hands of the person who derived it, is taxed in the hands of another person at a lower rate.
Statement showing the results of a business operation for a particular period of time. The statement will show the business's revenues and expenses.
Income Subject To Tax
All sources of income are liable to tax without taking account of tax allowances.
The process by which a company receives a government charter allowing it to operate as a corporation.
An assignment that is realistically expected to last for more than one year or that does in fact last more than one year.
Amount of money received by persons or entities as compensation for damages or for losses incurred.
A non-employee who performs services for a person. The person for which they perform services has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
Two enterprises are independent enterprises with respect to each other if they are not associated enterprises with respect to each other.
Independent Personal Services
Services performed by an independent contractor. An independent contractor is hired to do work according to his own methods and is not subject to the control of an employer except as to the result of his work.
Expedient adopted in many commercial transactions to provide a workable solution to some of the problems created by inflation and monetary depreciation. The mechanism is one of adjusting payments, profits, gains, taxable income brackets, tax allowances, etc. by discounting or otherwise modifying them by reference to an accepted index of inflation or other indices.
Costs that cannot be identified in relation to a particular activity but that, nevertheless, are related to the direct costs (e.g., overhead expenses, costs of supporting departments, and a proper share of research and development (R&D) costs).
Tax imposed on certain transactions, goods or events. Examples include VAT, sales tax, excise duties, stamp duty, services tax, registration duty and transaction tax.
A method of charging for intra-group services based upon cost allocation and apportionment methods.
Individual Retirement Arrangement (IRA)
A personal savings plan that offers an individual tax advantages to set aside money for retirement.
Individual Taxpayer Identification Number (ITIN)
A nine-digit number issued by the IRS to resident and nonresident aliens who are not eligible to get a Social Security number. An ITIN is issued exclusively for tax reporting or filing purposes.
Declaration made by a person who has economic information about a potential taxpayer, regardless of whether that person is liable for withholding tax.
An individual who files a joint return for which all or part of their share of the overpayment was, or is expected to be, applied toward their spouse's past-due federal tax, child or spousal support, federal non-tax debt (such as a student loan), or state income tax.
A taxpayer who did not know and had no way of reasonably knowing that there was an understatement of tax due to erroneous items of their spouse (or former spouse) on their joint return.
Term used in connection with VAT to denote the tax embodied in purchases made by a trader or entrepreneur who will usually be able to obtain a credit for the tax that his suppliers have paid on the goods supplied to him which form his "inputs".
Insolvency is a state of financial distress in which a person or business is unable to pay their debts. Insolvency can occur when a person's debt exceeds the value of their assets. Insolvency is different from bankruptcy, but it is criteria for bankruptcy. There are two main types of insolvency: cash flow insolvency and accounting insolvency. Insolvency proceedings include administration, liquidation, receivership, and voluntary arrangement.
The condition that occurs when a taxpayer's debts are more than the fair market value of their assets.
An agreement with the IRS to pay tax debt in smaller, more manageable amounts (installments).
A sale of property in which the seller receives at least one payment after the tax year of the sale.
Property that has value but cannot be seen or touched, such as goodwill, patents, copyrights, and computer software
A tax based on the value of certain intangible personal property, such as portfolio income (income from stocks, bonds, mutual fund shares, etc.).
Literary, dramatic, musical, artistic and scientific works are intellectual property which is protected by copyright, patent, registered design, trade mark, etc.
A benefit provided by one associated enterprise to another associated enterprise within the group is deliberately balanced by different benefits received from that enterprise in return.
Transactions between members of an affiliated group filing a consolidated return; gain or loss is deferred until a property is disposed of outside the group.
Dividends distributed between two companies (domestic or foreign) arising from a shareholding or participation in the capital of the paying company.
The fee received for lending money, usually calculated as a percentage rate for a certain time period. Interest can be earned through depositing money in savings programs, buying certificates of deposits (CDs) or bonds, or lending money to people.
In the context of the European Union, an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured.
Internal Revenue Code (IRC)
Legislation passed by US Congress that specifies what income is to be taxed, how it is to be taxed, and what may be deducted from taxable income.
Internal Revenue Manual (IRM)
An official compilation of policies, procedures, instructions, and guidelines for the organization, functions, operation, and administration of the Internal Revenue Service. The IRM guidelines do not confer any rights on taxpayers.
Internal Revenue Service (IRS)
The agency of the US federal government that is responsible for the administration and collection of federal taxes.
International Monetary Fund (IMF)
An international organization established in 1945, headquartered in Washington, DC. The purposes of the IMF are, inter alia, to promote international monetary cooperation, facilitate the expansion and balance growth of international trade and promote stability in foreign exchange.
Traditionally, international taxation refers to treaty provisions relieving international double taxation. In broader terms, it includes domestic legislation covering foreign income of residents (worldwide income) and domestic income of non-residents.
Intra Group Services
Services provided by a group company to another affiliated company. The cost of general services such as management, administrative and similar services may be often allocated among the various members of the group without any profit mark-up, whereas services performed in the ordinary course of business are subject to arm's length conditions.
Property or merchandise the individual produces or purchases to sell in the natural course of their trade or business.
The purchase of stocks, bonds, mutual fund shares, real property, an annuity, collectibles, or other assets, with the expectation of obtaining income or capital gains-or both-in the future.
Allowance with respect to a qualifying depreciable asset. It adds a certain percentage of the asset's initial cost to the full depreciation write-off and is usually given in the year of acquisition or as soon as possible thereafter.
Corporation whose activities consist exclusively or substantially of making investments (i.e. holding property and collection of income therefrom) and whose buying and selling of shares, securities, real estate or other investment property is only incidental to this purpose.
Financial and tax incentives are used to attract local or foreign investment capital to certain activities or particular areas in a country.
Income derived from the investment of capital, whether money or other property, in income-producing assets or in a profit-making venture without active participation in the production of the income or in the affairs of the venture.
Method used in connection with VAT where an immediate credit is granted against tax for that part of expenditure incurred during the year for acquisition of business assets (such as plant and machinery by a manufacturer) which related to the tax element in the price of such assets.
Generally, property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business.
This system permits eligible taxpayers to set aside part of their profits as a reserve for future investment and deduct from their income the amount of the annual contribution to the reserve.
Method of applying VAT to the price at which the goods or service are invoiced, with a deduction for the tax (if any) charged at previous stages.
The term used in the context of transfer pricing to refer to a company established in a low-tax or no-tax jurisdiction for the purpose of shifting profits to that jurisdiction.
The forced (not voluntary) disposition of property due to theft, casualty, or condemnation, and the receipt of other property or money in payment of this property, such as insurance or a condemnation award. An involuntary conversion is also called an involuntary exchange.
For a traditional IRA, the amount of nondeductible traditional IRA contributions in the person's IRA. For a Roth IRA, the amount of contributions and conversions to the Roth IRA.
In the US, a deduction as specifically set forth in the Internal Revenue Code. The deductions in this part are individually listed, item by item.
Joint and Survivor Annuity
An annuity from which more than one person can receive regular payments. Upon the original annuitant's death, regular payments are made to the designated survivor.
A form of property ownership in which two or more individuals own property jointly. If one owner dies, the survivors are automatically entitled to the decedent's share of the property.
A term which is loosely used to describe a relationship between parties carrying on an undertaking in common for their individual or common gain. This can be either an incorporated venture or a trustee venture.
Company with legal personality and whose capital is divided into shares. The shareholders are liable only to the extent of the nominal value of their shares.
Bonds and debentures issued by companies that have a low credit evaluation (i.e. below investment grade) from a rating agency such as Standard & Poor's or Moody's.
A retirement savings plan that is available to self-employed taxpayers. Contributions are deductible within specific limits.
The kiddie tax was designed to prevent parents from lowering the family’s tax bill by transferring income-producing assets to children in lower tax brackets. This tax applies to all children age 18 or younger, as well as to full-time students who are between 19 to 23 years old and whose earned income is ≤ 50% of his/her support.
A child who is presumed by law enforcement authorities to have been kidnapped by someone who is not a family member.
All undivulged technical information, whether or not capable of being patented, that is necessary for the industrial reproduction of a product or process.
Term used in relation to the importation of goods which means the sum total of the cost of the goods concerned, the amount of customs duties levied on those goods and the expense incurred in unloading them.
In general, a lease is a contract in respect of real or personal property, under which the owner of the property grants to another the right to possess, use and enjoy the property for a specified period in exchange for periodic payments.
Corporations, joint-stock companies and limited liability companies are regarded for tax purposes as having an existence separate from that of their shareholders. Conversely, for tax purposes a partnership is often not regarded as a separate legal entity, its profits being taxed in the hands of the individual partners. What constitutes a legal entity for tax purposes may or may not coincide with what constitutes a legal entity for general law purposes.
Under civil law corporations are required to maintain a legal reserve for all needs which may arise during the business. Tax law does not allow a deduction for such a reserve.
A company which has compiled only the essentials for organization and registration in a particular country. The actual commercial activities are conducted in another country.
Level Playing Field
This term denotes reducing, by means of tax policy, the differences in the taxation of internationally mobile entities or transactions allowing countries to compete fairly on non-tax factors.
Licensing is an agreement by which a licensor transfers the right to use his technology and/or know-how to a licensee for the production or manufacturing of a product in the licensee's country. Royalties are paid for the right to use the technology or know-how.
A charge against property, making it security for the payment of a debt, judgment, mortgage, or taxes.
Assets may be given to a person for his lifetime use or benefit, with the stipulation that after his (the life tenant's) life, the assets will pass to another beneficiary.
Under common law an interest in possession whereby the individual beneficiary is entitled to the income of a trust or settlement until his death.
Method ("last in, first out") of valuing inventory or stock-in-trade whereby the goods or materials purchased last are regarded as those which are sold first.
Properties of the same nature or character, even if they differ in grade or quality.
Limitation On Benefits Provision
Tax treaty provisions are designed to restrict treaty-shopping opportunities by limiting treaty benefits to persons who meet one of several enumerated tests, which may require minimum level qualifications, e.g., local ownership.
Limited Liability Company
An entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for federal income tax purposes as a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in the Treasury Regulations, section 301.7701-3.
Limited Liability Partnership (LLP
A partnership formed under a state limited liability partnership law. Generally, a partner in an LLP is not personally liable for the debts of the LLP or any other partner, nor is a partner liable for the acts or omissions of any other partner, solely by reason of being a partner.
A partnership formed under a state's limited partnership law and composed of at least one general partner and one or more limited partners.
Structure operating because of the different rules in various countries for determining the place of residence; it is a means used by dual resident companies to obtain tax relief in two countries.
A company in liquidation is a company in the process of being dissolved or wound up, and its assets, if any, after payment of its debts, distributed to the shareholders.
Items specifically named (listed) in IRS code as subject to special rules for depreciation. Listed property includes passenger automobiles and any other property used for transportation; property of a type used generally for entertainment, recreation, or amusement; computers and their peripheral equipment (unless used only at a regular business establishment and owned or leased by the person operating the establishment); and cellular telephones or similar telecommunications equipment.
In countries where there is a central or federal government and separate levels of government at state, provincial, county or city levels, taxes levied at the lower levels of government are commonly referred to as "local" taxes.
Location Of Assets
The location of an asset is relevant to the determination of whether it is within a taxing authority's jurisdiction. Location of immovable property in a country means, in most countries, that the country taxes the income derived therefrom and possibly the value and capital gains realized on alienation, even if the owner is not a resident of that country.
The term used in the context of transfer pricing refers to the savings or benefits such as cheaper production or service costs obtained by sitting manufacturing operations in an offshore jurisdiction.
Long-Term Capital Gains
In countries where capital gains are subject to special tax treatment, a distinction may be made between capital gains realized after a short period of time and capital gains realized after a longer period. Long-term capital gains may be taxed at reduced rates.
Term typically used when disregarding the separate legal identity, for example, a company, in order to charge tax on a shareholder in respect of his share of the company profits.
Most income tax laws provide some form of relief for losses incurred, either by carrying over the loss to offset it against profits in previous years (carry-back) or in future years (carry-forward) or by setting off the loss against other income of the same taxpayer in the year in which the loss was incurred.
The term may broadly be defined as the excess of expenses over revenues for a period, or the excess of the cost of assets over the proceeds when the assets are sold or otherwise disposed of, or abandoned or destroyed.
Deduction, often from income, for the computation of taxable income, which does not reflect the factual situation.
The distribution or payment made in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind; for example, pension, profit-sharing, or stock bonus plan.
A vehicle for which the depreciation deduction is limited because of its purchase price.
Indirect ad valorem tax imposed on supplies of specific non-essential and normally expensive commodities.
1. Expenses incurred by a taxpayer to provide for his family, former spouse, or other relatives. 2. Expenses for the upkeep or preservation of a building or equipment.
Improper or immoral conduct of a professional in the performance of his duties, done either intentionally or through carelessness or ignorance; commonly applied to accountants, tax preparers, and lawyers to denote negligent or unskillful performance of duties where professional skills are obligatory.
Expenses of management are deductible in arriving at the taxable profits of an enterprise carrying on a trade. In the case of a group of companies it may be important to decide how far the general expenses of management of the group should be charged to and recovered from the members of the group.
A fee or charge imposed for management and/or administrative services of a parent company or head office.
Marginal Rate of Tax
Tax rate applicable to the top slice or bracket of a taxpayer's income or other taxable income, where the relevant tax on such items is levied at progressive rates.
Mark to Market
Tax and/or accounting convention under which the value of assets/liabilities is adjusted to reflect fair market value of a specific date.
An increase in the price of something, especially from the price a trader pays for something to the price he sells it for. In the context of transfer pricing, one method to estimate an arm's length price for transactions between affiliated companies is to increase the supplier's cost by an appropriate profit mark-up (Cost-plus method).
An intangible that is concerned with marketing activities, which aids in the commercial exploitation of a product or service and/or has an important promotional value for the product concerned.
A legal union between a man and a woman as husband and wife. For federal income tax purposes, this definition supersedes any state definitions.
The satisfaction of one of several tests used to determine that a trade or business is not a passive activity. Generally, material participation in an activity includes being involved in its operations on a regular, continuous, and substantial basis during the year.
Medical Care Expenses
Amounts paid for the diagnosis, cure, relief, treatment, or prevention of disease and for treatments affecting any part or function of the body. The medical care expenses must be primarily to relieve or prevent a physical or mental defect or illness.
Memorandum of Understanding (MOU)
In the context of a tax treaty, a document exchanged between the treaty partners which sets out the understanding of the parties regarding the convention. Usually this does not have treaty status, but the status depends on the document itself.
Term generally used to describe a number of operations involving the reorganization of companies.
Regular payments, usually based on the volume or price of minerals extracted, are made by mining enterprises to national states or other owners of mineral resources as consideration for the right to exploit mineral resources.
Minimum Required Distribution
The smallest amount that must be distributed from a qualified plan to prevent an additional tax on excess accumulation. Also called a required minimum distribution.
Minimum Retirement Age
Generally, the earliest age at which a taxpayer can first receive a pension or an annuity if they are not disabled.
In certain countries, corporations are always liable to a certain amount of annual tax, regardless of whether they have realized a profit.
An individual who is duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for Social Security purposes.
Ministerial Qualified Services
Services performed in the exercise of the taxpayer's ministry or in the exercise of the taxpayer's duties as required by their religious order.
Ministry of Finance (MOF)
Department of government responsible for formulating monetary policy, implementing the tax laws, collecting revenue, etc.
Term used to designate an intermediate holding company the purpose of which is to "mix" income from various foreign sources in order to maximize the benefit of foreign tax credits. The mixer company receives income both from countries with a higher tax rate than that of the destination country and from countries with a lower tax rate, which it then pays out as a dividend. This structure has the effect of averaging out the rate of foreign tax paid.
Model Tax Conventions (Treaties)
A model tax treaty is designed to streamline and achieve uniformity in the allocation of taxing rights between countries in cross-border situations. Model tax treaties developed by OECD and UN are widely used and a number of countries have their own model treaties.
Modified Accelerated Cost Recovery System (MACRS)
The name given to tax rules relating to recovering, through depreciation deductions, the basis of most business and investment property placed in service after 1986.
Modified Adjusted Gross Income (MAGI)
Adjusted gross income that is modified to meet the requirements of a specific tax item. Modifications are specific for each tax item that uses MAGI.
A legal document an individual signs when they borrow money and put real estate up as collateral to protect the interests of the lender.
Test often found in tax rules which are designed to prevent tax avoidance. For example, the rules may provide that certain consequences will follow if the sole, main or principal purpose of certain transaction is the reduction of tax.
Multi-Stage Tax System
Indirect tax charged on the same goods at successive stages of production and distribution.
Multiple Support Agreement
A written agreement indicating which taxpayer can claim the dependent exemption for an individual when two or more qualifying taxpayers together provide more than half of the individual's support and individually provide more than 10% of the individual's support.
Mutual Agreement Procedure (MAP)
A means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorized by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment.
In the context of tax treaties, one of the contracting states will collect taxes due to the other contracting state.
A type of regulated investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities, or money market securities. Also, a portfolio of securities held by an investment company on behalf of investors.
The nationality of a taxpayer may affect the way he is taxed and the nature of his tax burden, but comprehensive income tax treaties commonly provide that foreign taxpayers should not suffer discriminatory taxation by reason of their nationality.
A helpful and appropriate expense for a field of trade, business, or profession; it does not have to be indispensable to be considered necessary.
Negative Income Tax
A proposed system of providing financial aid to poverty-level individuals and families, using the mechanisms already in place to collect income taxes. Low-income persons or families would receive a direct subsidy, called a negative income tax.
Failure to act as a reasonable and ordinarily prudent person would under the given circumstances.
Net Capital Gain
The amount by which the net long-term capital gain for the year exceeds the net short-term capital loss.
Net income is gross income of less deductible income-related expenses. Many countries levy income tax on this basis.
Difference between receipts from business transactions and deductible business expenses, subject to any adjustments for tax purposes.
Net Worth Tax
The taxable base for resident taxpayers is normally the taxpayer's worldwide net worth, i.e. total assets minus liabilities along with deductions and exemptions specially allowed by tax laws.
Often a requirement in tax law for determination of taxability or deductibility. For example, expenses are deductible if they have a “nexus” with gross income. In the US, the taxable income of a multistate corporation may be apportioned to a specific state only if the corporation has a sufficient nexus in the state.
Amount of capital that is defined as such in the articles of incorporation. Usually, a certain minimum amount of nominal capital is required to establish a legal entity.
Tax treaties frequently contain a "non-discrimination" article which stipulates that citizens or nationals of one country resident in the other country may not be subjected to local taxation which is different from or more burdensome than the tax to which citizens and nationals of the host country are subjected under the same circumstances (including as to residency).
Non-Qualified Stock Option
A stock option that does not meet the incentive stock option requirement under US tax law. The spread is taxed as ordinary income.
Broadly speaking, a person who spends most of the calendar year outside his country of domicile. Non-residents are usually taxed on income derived from sources within the taxing jurisdiction whereas residents may be taxed on worldwide income.
A non-resident individual who is not a citizen or national of the taxing jurisdiction.
A reimbursement or allowance arrangement under which an employer reimburses an employee or provides the employee an expense allowance regardless of whether the employee meets any of the requirements of an accountable plan.
The parent who has custody of a child for the shorter part of the year or who does not have custody at all.
Income from earnings or wages, active business participation, dividends, interest, or capital gains.
Nonperiodic Payment or Distribution
A payment or distribution from a retirement plan that does not recur on a regular basis.
Nonrecaptured Section 1231 Losses
The net section 1231 losses for the previous five years that have not been applied against a net section 1231 gain by treating the gain as ordinary income.
A credit that cannot be more than the tax liability on the taxpayer's tax return.
Nonresidential Real Property
Most real property (real estate) other than residential rental property.
Generally, an activity that has not produced a profit in at least three of the last five tax years, including the current year.
Notice of Assessment
The written decision of the tax authorities after a review of a taxpayer's return, whereby the amount of taxable income is determined and the amount of tax due is calculated.
The OECD (Organization for Economic Co-operation and Development) is a multilateral organization comprised of 30 countries, which are mostly Western European countries and other industrialized countries including US and Japan. Founded in 1961, the OECD provides a forum for representatives of countries to discuss and attempt to coordinate economic and social policies. It has an especially significant role in international tax matters. Its website is www.oecd.org.
Tax offenses may be specified in the tax laws covering matters such as late filing, late payment, failure to declare taxable income or transactions, and negligent or fraudulent misstatements in tax declarations.
For the purpose of the application of a tax treaty, the office of an enterprise normally forms a permanent establishment if the business of that enterprise is wholly or partly carried on through that office.
Offshore banking business consists of borrowing in foreign currencies for non-resident depositors outside the country and relending the foreign currencies to other non-residents. A number of countries have special regimes for the taxation of offshore banks.
Term usually applied to a company registered in a country (often a tax haven) other than the country or countries in which it carries on its business activities. An offshore (or non-resident owned) company is commonly used for captive insurance, marketing abroad, international shipping and tax shelter schemes.
A member of the US IRS Commissioner's immediate staff who directs the IRS's Problem Resolution Program.
On Call Services
Services provided by a parent company or a group service center, which are available at any time for members of an MNE group.
One Hundred and Eighty-three (183) Days' Rule
Presence in a country for 183 days or more in any 12-month period may have tax consequences, particularly in respect of an individual's residence for tax purposes or for the taxation of employment income (although other tests must also be met).
Onus of Proof
The burden and responsibility of proving an assertion. A widely adopted principle in tax law, for example, where the taxpayer has the basic responsibility of declaring his taxable income or transactions.
Lease where the lessor is regarded as the owner of the leased asset for tax purposes.
A contract conveying the right to buy (call) or sell (put) specific securities, commodities, or stocks at a predetermined price within a defined period.
Option to be Taxed
In the VAT context, a VAT exempt entrepreneur sometimes can claim to be subject to VAT, the advantage being that to be entitled to his input tax against his output tax.
An expense that is common and accepted in a field of trade, business, or profession.
Ordinary shares (also known as common stock) are shares with an equal par value and bear equal rights and obligations such as the right to participate in the management of the company by voting at the shareholders' meeting and the right to receive dividends. The rights of ordinary shareholders to receive dividends are generally subordinate to the rights of bond holders and preference shareholders.
Principle under a VAT regime where goods are taxed in the country where they are produced, i.e., they are taxed on the basis of their place of production or origin.
Original Issue Discount (OID)
A discount from par value at the time a bond is issued. The most extreme version of an OID is a zero-coupon bond, which is sold far below par value and pays no interest until it matures.
Income not otherwise mentioned in a tax treaty is frequently dealt with in a separate article, titled "other income".
Term which refers to the tax treatment of a country's residents doing business and investing abroad.
Term used in connection with VAT to denote the tax payable on the sales of goods or services by those who are subject to the tax and in contrast to the input tax for which a credit will be available.
The general expenses of a business as opposed to the direct cost of producing a good or service. "Overhead costs" is a term which may, in tax matters, also be used for costs incurred by the head office of a concern for the benefit of branches or subsidiaries.
The capital received by a corporation from investors for stock, as distinguished from capital generated by earnings or donated.
Company with a substantial participation in the share capital of another company, called the subsidiary.
An individual who shares ownership of an unincorporated trade or business with one or more persons.
An unincorporated organization with two or more parties who join together to carry on a trade or business, with each party contributing money, property, labor, or skills and expecting to share in the profits and losses of the business.
A nontaxable entity such as a partnership. Generally, the income or expense is passed to the underlying owner.
Any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans).
Generally, a trade or business activity in which a taxpayer did not materially participate and any rental activity (except a rental activity for those who qualify as real estate professionals).
Income from a trade or business activity in which a taxpayer did not materially participate and income from all real estate activities, regardless of their participation (except rental activities for those who qualify as real estate professionals).
The exclusive right granted to an owner or inventor to manufacture, use, or sell an invention for a limited period of time.
Tax charged on an employer's payroll (i.e., gross salaries, wages, and other remunerations) paid to his employee without regard to their domicile, family status, or other individual circumstances.
Administrative penalties are imposed for tax offences, such as failure to make a timely return or payment, negligence, and making a false return or statement. They take the form of additions to the tax and are assessed as part of the tax. Criminal penalties, on the other hand, are enforceable only by prosecution. A prison sentence may be imposed for serious tax fraud.
Generally, a series of regular definitely determinable payments made to the individual after they retire from work.
Latin for "by the day"; referring to daily allowance, usually for travel, entertainment, employee compensation, or miscellaneous out-of-pocket expenses incurred while conducting a business transaction.
Period of Limitations
The period of time after which a taxpayer can bring no legal action against the IRS regarding their tax return or vice versa.
Periodic Payment or Distribution
A payment or distribution from a retirement plan that recurs on a regular basis, such as monthly or yearly.
Permanent Establishment (PE)
Term used in double taxation agreement (although it may also be used in national tax legislation) to refer to a situation where a non-resident entrepreneur is taxable in a country; that is, an enterprise in one country will not be liable to the income tax of the other country unless it has a "permanent establishment" thorough which it conducts business in that other country. Even if it has a PE, the income to be taxed will only be to the extent that it is ‘attributable’ to the PE.
Permanently and Totally Disabled
A condition that indicates an individual cannot engage in any substantial gainful activity because of a physical or mental condition. A physician must certify that the condition has lasted or can be expected to last continually for at least 12 months or that the condition can be expected to result in death.
Personal allowances are granted to individuals as deductions from income in computing their taxable income. There is usually a deduction for the individual himself, spouse, children, and other dependents.
Personal Holding Company
A company, the shares of which are principally owned by or attributed to the taxpayer, and which is set up to receive his investment income.
Things movable as distinguished from real property or things attached to the realty; also called “personalty”.
A court-appointed executor or administrator of an estate or anyone who is in charge of a deceased individual's property.
Personal Service Activity
An activity that involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
Personal Service Corporation
A corporation for which the main work is the performance of personal service activities and for which these activities are substantially performed by employees who are also owners of the corporation.
A written application addressed to a court or judge, and stating facts and circumstances relied upon as a cause for judicial action.
Phantom Stock Plan
A deferred-compensation plan that uses the employer's stock in the business as a measuring rod for determining the value of the compensation payment. Hypothetical shares of stock are allocated to the employee, and accrued appreciation and/or dividends to the hypothetical shares are paid in cash to the employee.
Piercing the Corporate Veil
The process of imposing liability for corporate activity, in disregard of the corporate entity, on a person or entity other than the offending corporation itself; a US legal doctrine.
Place of Effective Management
Place of effective management is the test suggested in the tie-breaker rule of the OECD model tax treaty to determine the residence of a company where under the domestic laws of both contracting states the company is resident in both of them. The test determines that in such cases the company would, for treaty purposes, be resident in the state in which its place of effective management is situated.
Place of Management
For purposes of the application of a tax treaty, the place of management of an enterprise normally forms a permanent establishment. The term "place of management" as such is not defined in the OECD model tax treaty, but may be defined in national tax law.
Placed in Service
Ready and available for a specific use whether in a trade or business, the production of income, a tax-exempt activity, or a personal activity.
Mortgage interest fees paid to reduce the initial interest rate on a loan. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.
A person who owns the proceeds of an insurance contract. The policyholder may also be the insured.
Collective basis for the purpose of depreciation of business assets falling within the same category. For example, all depreciable assets of a similar kind are effectively treated as a single asset for depreciation purposes.
Interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business; a gain or loss from the disposition of property that produces these types of income or that is held for investment.
Category of interest that may be paid from US sources free of withholding tax provided certain requirements are met. The portfolio interest exemption does not apply to bank loans made in the ordinary course of business.
A portfolio investment in a company would be a holding of shares amounting to a small portion of the total shares of the company, e.g., less than 10 percent. Portfolio investors may receive different tax relief or other treatment in respect of their dividends under tax treaties from those accorded to other direct investors.
Possessions of U.S.
In general, any US island, cay, or reef that is not part of any of the 50 states. For tax purposes, possessions include Puerto Rico, the Virgin Islands, the Marshall Islands, the Federated States of Micronesia, American Samoa, Guam, the Canal Zone, Mariana Islands, Johnson Island, and Wake Island.
Education beyond high school at a college, university, or vocational school.
Power of Attorney
Instrument in writing by which one person, as principal, appoints another as his agent and confers upon him the authority to perform certain specified acts or kinds of acts on behalf of the principal.
The voluntary contribution an employer deducts from an employee's pay that is not subject to income tax. Also known as deferred compensation or elective deferral.
The obligation of the courts to adhere to principles enunciated in previously decided cases when making adjudications in cases involving the same material facts and legal issues.
Shares which carry a right to a prior and usually fixed dividend, ahead of dividends paid to ordinary shareholders.
A type of share in the ownership of a company that usually does not provide voting rights, but the preferred stock shareholders' claim to dividends comes before shareholders owning common stock.
In the context of a derivative financial instrument, a premium is the amount a purchaser pays for an option. In the context of a bond or other debt instrument, it is the amount paid in excess of the face amount.
Premium at the Issue of Shares
Excess of issue value over par value in issuing corporate shares. It is a contribution to capital and not taxed as profits.
Presidentially Declared Disaster Area
An area declared by the president of the United States to be eligible for federal assistance under the Disaster Relief and Emergency Assistance Act.
Concept of taxation according to which income tax is based on "average" income instead of actual income.
Price Increase Reserve
Reserve to take account of expected increase in prices of goods, raw materials, etc. which must be replaced in the course of business.
An adjustment that a tax administration in a first jurisdiction makes to a company's taxable profits as a result of applying the arm's length principle to transactions involving an associated enterprise in a second tax jurisdiction.
The face value of an obligation, such as a bond or a loan, which must be repaid at maturity, as separate from the interest.
Prior-Year Unallowed Losses
Losses not allowed in prior years due to basis limitations, at-risk limitations, or passive activity loss limitations that are carried forward to the current tax year.
Private Activity Bond
A tax-exempt bond issued by a state or locality to finance the private development of public projects for the benefit of the general public.
Ruling granted by the tax authorities to a single taxpayer, usually with respect to a single transaction or series of transactions. Normally the ruling can be relied upon only by the taxpayer to whom it is issued, not by other taxpayers, and is binding upon the tax authority provided all relevant facts have been disclosed.
Under the general rules of international law or under the provisions of special agreements, diplomatic agents and consular officers are in most cases exempt from tax in the state to which they are seconded. Many tax treaties include a clause that the right to tax income arising from outside the state is reserved to the sending state.
Pro Rata Rule
Under most VAT systems, a credit for part of the input tax is allowed for VAT previously paid on goods and services when they are used in taxable and exempt (without credit) transactions and total transactions occurring during a calendar year.
Services independently performed by members of the liberal professions (i.e. physicians, lawyers, accountants, etc.) and other activities of an independent character.
Method to find an arm's length price by taking the vendor's cost and adding an appropriate profit mark-up.
Method used in transfer pricing cases that looks at the profits arising from controlled transactions of one or more of the associated enterprises participating in such transactions.
Term used to denote the ratio of profits of an enterprise to its capital or net worth, and sometimes used as a basis for taxation.
Allocation of income and expenses between related corporations or branches of the same legal entity (e.g. by using transfer pricing) in order to reduce the overall tax liability of the group or corporation.
Profit Split Method
Transfer pricing method that allocates the combined operating income or loss from a transaction among the separate parties by determining the relative value of each party's contribution to such overall profits or loss.
Tax imposed on business profits in addition to ordinary income tax or as distinct from income tax imposed on other forms of income.
The rates of individual income tax are usually progressive, i.e. an increasing proportion of income must be paid in tax as the income increases.
Damage resulting from a steadily ongoing operation or a normal process, rather than from a sudden event.
A category for property under the Modified Accelerated Cost Recovery System (MACRS) that generally determines the depreciation method, recovery period, and convention.
Group of taxes imposed on property owned by individuals and businesses based on the assessed value of each property.
An unincorporated business owned by a single person. The individual proprietor has the right to all the profits from the business and also the responsibility for all its liabilities.
Signed document containing the points on which agreement has been reached by the negotiating parties preliminary to a final treaty. For tax purposes, a protocol is signed and ratified by the parties in addition to an existing tax treaty. The protocol may be signed simultaneously with the tax treaty or later, and it clarifies, implements or modifies treaty provisions.
Assessment of tax made before it is possible to make a final assessment which is often based on, for example, estimated figure or the previous year's figures.
Publicly Held Corporation
A corporation that has a class of common stock registered on a national stock exchange; a US concept.
Publicly Traded Partnership
A partnership in which the partnership's interests are traded on an established securities market or are readily tradable on a secondary market (or its substantial equivalent).
A contract granting the owner of a security the right to sell the security at a predetermined price during a specified period of time.
Certain ordinary dividends received in tax years beginning after 2002 that are subject to the same 5% or 15% maximum tax rate that applies to net capital gains.
Qualified Employee Plan
An employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries and that meets Internal Revenue Code requirements.
Qualified Long-term Care Service
Services that are necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, or necessary maintenance and personal care services, required by a chronically ill individual. The services must be provided pursuant to a plan of care prescribed by a licensed health care practitioner.
Qualified Nonrecourse Financing
Financing for which no one is personally liable for repayment and for which the financing is all of the following: (1) borrowed in connection with the activity of holding real property, (2) secured by real property used in the activity, (3) not convertible from a debt obligation to an ownership interest, and (4) loaned or guaranteed by any federal, state, or local government or borrowed from a qualified person. (Qualified persons generally include any person actively and regularly engaged in the business of lending money; for example, a bank or savings and loan association.)
Generally, a charitable organization that must apply to the IRS to be considered a qualified tax-exempt entity (unless it is a church or government entity).
Qualified Retirement Plan
A retirement plan that conforms to a specific set of legal rules. Qualified retirement plans include IRAs, 401(k), 403(b) and 457(b) plans. Conforming profit-sharing plans and employee stock ownership plans are also qualified retirement plans.
Qualified Services (Religious)
Services performed in the exercise of the taxpayer's ministry or in the exercise of the taxpayer's duties as required by their religious order.
Qualified Small Business
A sole proprietorship or a partnership that has average annual gross receipts (reduced by returns and allowances) of $5 million or less during a three-year period ending with the tax year of a net operating loss or the period the business was in existence if the business did not exist for the entire three-year period.
Qualified Tuition Program (QTP)
A program (also known as a 529 plan or program) established by a state or by an eligible educational institution that is set up to allow either prepayment of or contributions to an account established for paying a student's qualified higher education expenses at an eligible educational institution.
In the context of the foreign tax credit system, this term denotes the separate calculation of the foreign tax payable on all foreign income of a particular category which may be credited against the domestic tax payable on that category of foreign income.
This term denotes the securities which have been admitted to an official stock exchange and are traded therein through sale, purchase or other disposal.
The formal legislative consent or acceptance required by the constitution or domestic law of a country before a treaty to which it is a party can come into effect.
Real Estate Investment Trust (REIT)
A trust that primarily invests in real estate or real estate secured loans. Most of the assets in real estate mutual fund include REITs.
Land and generally anything built on, growing on, or attached to land, such as buildings and their structural components (real estate).
A legal concept referring to a time when rights have become legally receivable, or obligations have become legally payable.
Realized Gain or Loss
The difference between the adjusted basis of the property and the sales price. In a like-kind exchange, the total of all money received, net liabilities given up, and the fair market value of all property received, minus the basis of the property traded is the realized gain or loss.
Treating a contribution to one type of IRA as having been made to another type of IRA.
The principle of give-and-take operates in a variety of tax contexts (particularly in the case of tax treaties) where an exchange of tax privileges between countries is desired. Reciprocity is a basis for relieving a taxpayer under domestic law, e.g. relief is granted for foreign tax if the other country gives corresponding or equivalent relief.
Recognized Gain or Loss
The part of a realized gain or loss that is a taxable gain or deductible loss. For a like-kind exchange, it is the lesser of realized gain or boot. A recognized (or taxable) gain is also known as the amount recognized.
The process of converting funds in a traditional IRA to a Roth IRA after they have been recharacterized. A reconversion cannot occur in the same tax year (or within 30 days, whichever is later) as the original conversion.
The ability of a lender to claim money from a borrower in default, in addition to the property pledged as collateral.
The basis of property has been fully recovered when the total of the section 179 and cumulative allowed or allowable depreciation deductions equals the cost or investment in the property.
Recovery of Tax
From the taxpayer's point of view, this may mean a refund of tax. From the tax authorities’ point of view, it may mean the collection of tax which is in arrears.
The payment or exchange of an obligation such as when stock is sold or converted or a bond is presented for payment.
In many countries the ordinary rates of tax charged under various tax laws may be reduced in particular situations. For example, under tax treaties, reduced withholding tax rates often apply to dividends, interest and royalties.
A credit that, when combined with a taxpayer's other tax payments, can reduce the amount of tax they owe, give them a refund, or increase their refund.
A nominative (or registered) security is a security in respect of which the owner's name is recorded in a register by the issuing company and the registered owner is the person entitled to all relevant rights.
Fixed or variable duty levied on documents which relate to the transfer of ownership or the right to use movable or immovable property, the formation or any change of status of a company, etc.
The federal tax liability imposed for the year without regard to the alternative minimum tax.
Regulated Investment Company (RIC)
Commonly called a mutual fund, this type of investment company is required by law to distribute interest, dividends, and capital gains to its shareholders. The income avoids double taxation by only being taxed at the personal level, not at the corporate level.
Property maintenance that keeps property in good operating condition and that does not materially add to the value of property or substantially lengthen its life.
Individuals and legal entities investing their capital in a foreign country in order to derive income from such capital may wish to transfer this capital or income back to their home country, i.e. to repatriate it. Repatriation also takes place when expatriate employees working in a foreign country want to send income to their home country.
The action of a lender or a seller taking property from an individual, usually because of loan default.
Required Beginning Date
The date at which an individual must begin receiving distributions from a qualified retirement plan.
Required Distribution Rules
Requirements for distributing qualified retirement plan funds. The requirements differ depending on whether the person is the owner or the beneficiary.
Required Minimum Distribution
The smallest amount that must be distributed from a qualified plan to prevent an additional tax on excess accumulation. Also called minimum required distribution.
Resale Price Margin
Gross margin measured by reference to the price at which goods purchased from another party are resold to independent enterprises.
Resale Price Method
Method used in transfer pricing between affiliated companies, under which an arm's length price is ascertained by deducting a normal profit margin from the resale price at which a buyer of inventory assets resells these assets to an unrelated party.
Research and Development (R&D)
Any systematic or intensive study carried out in the manufacturing and industrial field, the results of which are to be used for the production or improvement of products and processes.
Funds made to fulfil future costs or expenditures. There are legal reserves which may be required by company law and may be necessary before dividends are distributed.
A basis for the imposition of taxation. Usually, a resident taxpayer is taxed on a wider range of income or other taxable items than a non-resident. Residence in a state is a criterion for invoking a tax treaty of that state, and residence for treaty purposes involves considering the domestic law of residence for tax purposes, and then the requirements in Article 4 of the OECD Model, especially in the case of tiebreaker tests in cases of dual residence.
Residence Principle of Taxation
A principle according to which residents of a country are subject to tax on their worldwide income and non-residents are only subject to tax on domestic-source income.
A person who is liable for tax in a country or state because of domicile, residence, place of management, or other similar criterion.
A person is said to be a resident alien of a country if he resides in that country but is a citizen of another country.
Residential Rental Property
Any building or structure, such as a rental home (including a mobile home), for which 80% or more of its gross rental income for the tax year is from dwelling units.
An analysis used in the profit split method which divides the combined profit from the controlled transactions under examination in two stages. In the first stage, each participant is allocated sufficient profit to provide it with a basic return appropriate for the type of transactions in which it is engaged. Ordinarily this basic return would be determined by reference to the market returns achieved for similar types of transactions by independent enterprises. Thus, the basic return would generally not account for the return that would be generated by any unique and valuable assets possessed by the participants. In the second stage, any residual profit (or loss) remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances that might indicate how this residual would have been divided between independent enterprises.
Restricted Stock Plan
A stock option plan under which the transferred stock option is subject to restrictions regarding transferability and to substantial risk of forfeiture. Restricted stock is includable in the gross income of the employee in the first taxable year in which the rights become transferable or no longer subject to forfeiture.
Retail Sales Tax
Single-stage tax on the sale of goods to ultimate consumers, whether by retailers or other traders.
The portion of a corporation's after-tax profits that is not distributed to the shareholders, but rather is reinvested in the business.
Permanently withdrawing property from use in a trade or business or from use in the production of income.
The effect of tax law provision towards the past, which is allowed only to the advantage of a taxpayer.
Declaration of income, sales and other details made by or on behalf of the taxpayer. Forms are often provided by the tax authorities for this purpose.
Return of Capital
A distribution that is not paid out of the earnings and profits of a corporation. Rather, it is a return of the shareholder's investment in the stock of the company.
Constraints on tax reform that it should not change revenues available to government in any significant way.
Revenue Procedure (Rev. Proc.)
An official published statement by the IRS about procedural and administrative aspects of the tax laws.
Theoretical enclosure established by tax legislation around certain profits, losses, transactions or groups of transactions in order to isolate them for tax purposes.
A tax-free withdrawal of cash or other assets from a qualified retirement plan that is reinvested into another qualified retirement plan within 60 days.
A type of IRA that allows an individual (subject to certain income limits) to save for retirement while allowing the savings to grow tax-free.
Round Trip Transaction
Potential transfer pricing abuse where intangible property is developed by a parent company which licenses it to a related party manufacturer located in a low-tax jurisdiction. The manufactured goods are resold to the parent for distribution to ultimate consumers.
Payments of any kind received as consideration for the use of, or the right to use intellectual property, such as a copyright, patent, trade mark, design or model, plan, secret formula or process.
Decisions or opinions of the tax authorities in respect of factual situations which come before it as part of an assessment procedure or in response to taxpayer questions.
A corporation that generally is exempt from federal income tax. Its shareholders include on their tax returns their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of income or loss not separately stated. An S corporation may have no more than 100 shareholders, may have only one class of stock, and must be a domestic corporation.
Where tax authorities give general guidelines on the interpretation of tax laws, these may state that transactions falling within a certain range will be accepted by the tax authorities without further questions.
Sale and Leaseback
In a sale and leaseback transaction, the owner of property will sell it to a buyer who then leases it back to the original owner. This method is sometimes used to release the value of capital assets for use in a business.
Tax imposed as a percentage of the price of goods (and sometimes services). The tax is generally paid by the buyer, but the seller is responsible for collecting and remitting the tax to the tax authorities.
The estimated value of property at the end of its useful life. Salvage value is not used under the Modified Accelerated Cost Recovery System.
Schedular Tax System
Tax system in which income from various sources is taxed separately (i.e. under a different "schedule"; thus, separate tax assessments are made on industrial and commercial profits, wages and salaries, income from securities and shares, income from land, etc.
Generally, an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies.
A money substitute, such as a card or paper certificate, that is used in exchange for goods and services.
A taxable entity controlled by another taxable entity that is in turn controlled by a third entity.
A constructive transaction that some countries will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment. Secondary transactions may take the form of constructive dividends, constructive equity contributions, or constructive loans.
A term used in the transfer pricing context. It denotes a comparable whose data is not disclosed to the public or the taxpayer but known only to the tax authority which is making the transfer pricing adjustment.
Section 1231 Transactions
Sales, exchanges, and involuntary conversions of business, rental, and royalty property held longer than one year.
Section 1245 Property
Any property that is or has been subject to depreciation or amortization and is personal property, a single purpose agricultural or horticultural structure, or a storage facility (other than a building or its structural components) used for the distribution of petroleum.
Section 1250 Property
Real property (other than section 1245 property) that is or has been subject to an allowance for depreciation.
Section 179 Property
Property defined under section 179 of the IRS code for which a taxpayer can choose to recover all or part of the cost of the property (up to a limit) by deducting it in the year they place the property in service.
Section 197 Intangibles
Assets listed in section 197 of the IRS code that a taxpayer can choose to amortize over a period of 15 years.
The part of the US income tax code that gives the IRS the power to adjust distribute, apportion, or allocate gross income, deductions, credits, or allowances in order to prevent evasion of taxes or to clearly reflect income (often between controlled taxpayers); in short, US transfer pricing rule provision.
Section 482 White Paper
Study of intercompany pricing transactions made by the Office of International Tax Counsel at the US Treasury Department which presented a new methodology to govern transactions involving the sale, licensing or transfer of intangible property, published in 1988.
Documents providing evidence of a share in the capital of a company (e.g. share certificate), or the indebtedness of some person to the holder (e.g. government or corporate bonds) or similar legal rights.
System under which the taxpayer is required to declare the basis of his assessment (e.g., taxable income), to submit a calculation of the tax due and, usually, to accompany his calculation with payment of the amount due. The role of tax authorities is to check that the taxpayer has correctly disclosed his income.
An independent contractor, a person who carries on a trade or business as a sole proprietor, an active member of a partnership, or a person who is in business for themselves in any other way.
Social Security tax and Medicare tax primarily for individuals who work for themselves.
Separate Maintenance Decree
A legal document, court order, or agreement specifying amounts paid to one spouse by another spouse while they live apart.
Separate taxation is a method of taxing a married couple based on their joint income. It is mandatory in some countries and optional in others. Upon exercising an option for separate taxation, a husband and wife are treated as separate individuals for the purpose of computing income tax.
Separately Stated Items
The beneficiary, partner, or shareholder's distributive share of income and deductions from an estate, trust, partnership, or S corporation reported on a Schedule K-1.
Company within a multinational group of companies which generally provides support services, such as administration, sales information, post-sales service or market research, for the operating divisions of the group.
A fee for the rendering of services is regarded as income from business activities or, in the case of a liberal profession, as income from independent personal services.
Payment made as a result of the termination of any office or employment of a person.
Share (Stock) Options For Employees
Some companies grant directors and employees an option to acquire at a future date shares or stock in the company at a predetermined price. It gives an employee the opportunity to benefit from the future success of the company when the market value of the shares increases over the predetermined option acquisition price.
Shared Equity Financing Agreement
An agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit (including the land), and one or more co-owners are entitled to occupy the unit as their main home upon payment of rent ot the other co-owner or owners.
An activity which is performed by a member of an MNE group (usually the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder.
The total assets minus total liabilities of a corporation, also called stockholders' equity or net worth.
A school operated by certain tax-exempt organizations (or by a state, a U.S. possession, a political subdivision of a state or possession, the U.S., or the District of Columbia) that provides special instruction or training designed to alleviate the disability of an individual.
Shifting an Incidence of Taxation
Determination of the economic entity that ends up paying a particular tax. In the case of indirect taxation tax is normally intended to fall upon consumption and be borne by consumers, so that entrepreneur who pays the tax on his supplies of goods and services in general passes on the tax, or "shifts" it "forward" to the consumer by adjusting his prices appropriately. Such taxes are said to be shifted "backward" in the case that entrepreneurs are forced to absorb some of new or increased tax.
Short-Term Capital Gains
Capital gain derived from the disposal of assets which have been held for a comparatively short period of time.
A payment to an employee to replace regular wages while they are temporarily absent from work due to sickness or personal injury.
SIMPLE (Savings Incentive Match Plan for Employees) 401(k)
A qualified retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees.
SIMPLE (Savings Incentive Match Plan for Employees) IRA
A qualified retirement plan, using IRAs, that certain small employers (including self-employed individuals) can set up for the benefit of their employees.
Simplified Employee Pension (SEP)
A written qualified retirement plan that allows self-employed individuals to make contributions toward their own, and their employees', retirement using a traditional individual retirement arrangement (called a SEP-IRA).
The required method of calculating the taxable portion of benefits from a qualified retirement plan with an annuity starting date after November 18, 1996.
Simultaneous Tax Examination
A simultaneous tax examination, as defined in Part A of the OECD Model Agreement for the Undertaking of Simultaneous Tax Examinations, means an "arrangement between two or more parties to examine simultaneously and independently, each on its own territory, the tax affairs of (a) taxpayer(s) in which they have a common or related interest with a view to exchanging any relevant information which they so obtain".
Single Entity Approach
Method of taxing a legal entity that conducts its business through a permanent establishment rather than through a subsidiary company. Under the single entity approach, a head office and a permanent establishment are treated as one taxpayer for tax purposes, even though they may be considered separate entities for purposes of accounting or commercial law.
Provision of tax law setting out the factors which determine where a particular asset is situated or deemed to be situated for tax purposes.
Small Business Corporation
Under US tax law, this term refers to a domestic corporation which does not have more than 35 individual shareholders, all of whom are US citizens or residents, and which does not have more than one class of stock. Also known as an "S corporation", this form permits income at the corporate level to be taxed only once at the shareholder level.
Small Business Relief
Term used to denote tax concessions which are available only to or principally to small businesses.
Small Traders, Special Tax Regime for
In many countries, small traders are subject to a special tax regime, particularly in respect of VAT, in which exemption, lower tax burden, or lower administrative burden are granted.
Tax or levy which is conditioned on the availability of a foreign tax credit in another country.
Social Security Contributions
Charges levied on employees, employers or self-employed or on all persons subject to individual income tax to cover the cost of providing future social security payments.
Source of Income
The place (or country) where a particular item of income is deemed to originate or where it is deemed to be generated. National rules vary, depending on which concept of source is used.
Source Principle of Taxation
Principle for the taxation of international income flows according to which a country considers as taxable income those incomes arising within its jurisdiction regardless of the residence of the taxpayer, i.e. residents and non-residents are taxed on income derived from the country.
Provision in the national law of a country or in a tax treaty which defined the concept of source for a particular type of income.
Gains from the disposal of capital assets which were originally acquired with a view to selling them for more than the cost of acquisition.
A type of corporate reorganization by which the shares of a new corporation (or the subsidiary company) are distributed to the original shareholders (or the parent's shareholders) without these shareholders surrendering any of their stock in the original (or parent) corporation.
A type of corporate reorganization by which the shares of a new corporation (or the subsidiary company) are distributed to the original shareholders (or the parent's shareholders) with these shareholders surrendering part of their stock in the original (or parent) corporation.
Under a split-up the shareholders of a parent company surrender all their stock in liquidation of that company and in return receive new shares in the corporation which the parent controlled or created immediately before the distribution.
The difference between an incentive stock option's exercise price and the stock's fair market value on the date of exercise.
Duty levied upon the issue of official documents such as passports, deeds, contracts for the transfer of ownership, etc. Usually, stamp duties are "levied" by way of a stamp being fixed to the document in question.
A predetermined dollar amount that reduces the income subject to tax. The amount varies depending on the taxpayer's filing status, age, blindness, and dependency status.
Standard Mileage Rate
A per mile rate, established by statute, that a taxpayer uses to calculate deductible vehicle expenses based on miles driven. Specific rates apply based on whether the use is for business, charity, moving, or medical reasons.
Costs for creating an active trade or business or investigating the creation of acquisition of an active trade or business. Start-up costs include any amounts paid or incurred in connection with any activity engaged in for profit and for the production of income in anticipation of the activity becoming an active trade or business.
Statute of Limitations
A statute limiting the period within which a specific legal action may be taken, such as the collection of tax, appeal from a decision of the tax authorities or lower court, etc.
A worker who would normally be considered an independent contractor, but is treated by statute as an employee. Statutory employees include full-time life insurance salespersons, certain agent or commission drivers, traveling salespersons, and certain home workers.
A share in a company that represents the portion of the company's earnings and assets that a shareholder owns.
Dividend distribution by a company to its shareholders in the form of additional shares in the company.
(1). The right to purchase or sell a stock at a specified price within a stated period (2). Employee stock option.
A method of calculating the depreciation for property that uses a percentage rate to deduct the same amount for each year in the recovery period. The percentage rate is determined by dividing one by the number of years in the recovery period.
Bond or debenture from which the interest coupons have been removed and sold separately.
Term which refers to those sections of the US tax code which provide for the taxation of US shareholders of controlled foreign corporations (CFC) in order to prevent the tax-free accumulation of earnings outside the US.
Latin for "under penalty"; a writ issued under the authority of a court to compel the appearance of a witness or of documents for a tax judicial proceeding.
Company effectively controlled by another company (i.e. the parent company). A variety of criteria, including share ownership ratio, may be employed to determine whether one company is a subsidiary of another company for tax purposes.
Substance Over Form Doctrine
Doctrine which allows the tax authorities to ignore the legal form of an arrangement and to look to its actual substance in order to prevent artificial structures form being used for tax avoidance purposes.
Substantial Gainful Activity
An activity in which the taxpayer must perform significant duties over a reasonable period of time while working for pay or profit or in work generally done for pay or profit.
Substantial Presence Test
Test used to determine residence status based on the number of days, months, etc. of physical presence within a country.
Super Royalty Provision
The US Income Tax Reform Act of 1986 says that royalties for the transfer (by sale, license, or otherwise) of intangible property to related foreign companies, which have been determined at the time of the transfer on an arm's length basis, may be adjusted in future years by the IRS if they are not commensurate with the income attributable to that intangible.
Determination of tax liabilities at the discretion of the tax authorities if an original assessment is incomplete or incorrect in any material respect.
The value resulting from the future acquisition of goods or services used or sold by a business because of business relationships with suppliers including a favorable credit rating or a favorable supply contract.
Additional amount which is calculated on and added to the normal charge or levy. In other words, the base on which a surcharge is assessed is the normal or basic amount due.
Derivative financial instrument in which two parties agree to exchange payments calculated by reference to a notional principal amount. In the classic interest rate swap agreement two parties contract to exchange interest payments based on the same amount of indebtedness of the same maturity and with the same payment dates; one party provides fixed interest rate payments in return for variable rate payments from the other party and vice versa.
A group of individuals who have formed a joint venture to undertake a project that the participants would be unable or unwilling to pursue alone.
Property that can be seen or touched, such as buildings, machinery, vehicles, furniture, and equipment.
A term which is used to describe the arrangement of a taxpayer's affairs that is intended to reduce his tax liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow.
Term used in connection with graduated system of taxation to refer, for example, to the slabs or slices of taxable income subject to particular rates of income tax.
Allowance of deduction from or a direct offset against the amount of tax due as opposed to an offset against income.
The failure to pay or a deliberate underpayment of taxes. underground economy—Money-making activities that people don't report to the government, including both illegal and legal activities.
The entire city or general area of an individual's regular place of business, employment, or post of duty, regardless of where they maintain their family home.
The amount of total tax due to the IRS after claiming credits and before reporting payments such as withholding and estimated payments.
The annual period used for keeping tax records and reporting income and expenses. The most common tax year is a calendar year, which ends December 31.
Interest income that is not subject to federal income tax. Tax-exempt interest may or may not be exempt from state income taxes.
Gross income minus any adjustments to income, any allowable exemptions, and either itemized deductions or the standard deduction.
Taxes On Gross Income
In some countries income taxes are levied on gross income (usually at lower rates) without deduction for expenses.
An individual subject to any internal revenue tax. All citizens of the U.S. and all individuals resident in the U.S. are subject to internal revenue tax.
Generally, a work assignment in a single location away from a taxpayer's tax home that the taxpayer realistically expects will last (and does last) for one year or less.
Tenancy by the Entirety
A form of property ownership in which a husband and wife own property jointly. If one owner dies, the survivor is automatically entitled to the decedent's share of the property.
Tenancy in Common
A form of property ownership in which two or more individuals own property separately. If one owner dies, the survivors are not automatically entitled to the decedent's share of the property.
Terminally Ill Individual
Any individual who has been certified by a physician to have an illness that can be reasonably expected to result in death in 24 months or less.
Terrorist Action or Military Action
Any activity primarily directed against the U.S. or its allies or any military action involving the U.S. Armed Forces resulting from violence or aggression against the U.S. or its allies.
The intentional taking and removing of money or other property from its rightful owner. The taking of property must be illegal under the laws of the state where it occurs and it must be done with criminal intent.
A method for calculating the taxable portion of benefits from a qualified plan for retirees whose annuity starting date was before July 2, 1986.
The method the IRS applies to determine who can claim the tax benefits when two or more tax returns are filed using the same individual as a qualifying child.
An interest-bearing savings account that restricts access to its funds for a defined time limit. Funds cannot be withdrawn before the limit without incurring a penalty.
Trade or Business
Generally, an activity carried on for a livelihood or in good faith to make a profit.
Any IRA that is not a Roth IRA, a Savings Incentive Match Plan for Employees (SIMPLE) IRA, or a Simplified Employee Pension IRA (SEP-IRA).
Someone who does not have a regular place of business or post of duty and does not have a place where they regularly live.
The ordinary and necessary expenses a person incurs while traveling away from home to meet the demands of their job.
The person who is responsible for managing the assets of a trust for the benefit of the beneficiaries and who is usually independent of the person who created the trust.
A transfer of funds in a traditional IRA from one trustee directly to another, either at the taxpayer's request or at the trustee's request. This is not a rollover.
The basis of property for purposes of calculating gain on a sale without taking into account any depreciation taken in earlier years but with adjustments for the section 179 deduction and any special depreciation allowance.
Underlying (Indirect) Tax Credit
In relation to a dividend, the credit for underlying tax is credit for the tax levied on the profits of the company out of which the dividends have been paid. Such relief may be given either under a tax treaty or in accordance with unilateral provisions.
Tax which is charged on corporate income out of which dividends are paid, but which does not appear as a direct deduction or withholding from the dividend itself.
Underpayment of Tax
The amount of tax that has not been paid by either withholding or estimated payments but that has been properly reported on the tax return.
A penalty assessed for not paying enough tax through withholding or because estimated tax payments were not made in a timely manner.
Understatement of Tax
The difference between the tax that should have been reported on the tax return (if all the income had been properly included and all the deductions correctly reported) and the lower tax that was actually reported on the return.
Undistributed Profits Tax
Annual tax imposed, in addition to the normal corporate income tax, on the undistributed portion of the profits or surplus of a corporation.
A substantial economic loss that would result in a taxpayer making payment on the due date of the amount of taxes with respect to which the extension is desired. Undue hardship is a condition precedent to the granting of an extension of time to make a tax payment.
Investment income (such as interest, dividends, and capital gains) and other income that is not generated by personal service (such as unemployment compensation, taxable Social Security benefits, pensions, annuities, and alimony).
Granting relief from the effects of international double taxation based on domestic legislation rather than the provisions of a tax treaty.
Land that has received no development, construction, or site preparation (i.e. raw land).
Unitary Tax System
Under a unitary tax system, the profits of the various branches of an enterprise or the various corporations of a group are calculated as if the entire group is a unity. A formula is used to apportion the net income of the whole group to the various parts of the group. Usually a combination of property, payroll, turnover, capital invested, manufacturing costs, etc. are formula factors.
Liability of an investor which extends to the full extent of his personal assets, as in the case of a sole proprietor or general partner.
A person who is unmarried or legally separated from their spouse under a divorce or separate maintenance decree. State law governs whether a taxpayer is married or legally separated under a divorce or separate maintenance decree. A taxpayer is considered unmarried for the entire year if they can be considered unmarried as of the last day of the tax year.
The part of the stated principal amount of an installment sale contract that is treated as interest when the contract does not provide for adequate stated interest.
Tax on goods which are used within the taxing authority although the goods were purchased in another jurisdiction.
The estimated length of time it takes for property to wear out, decay, get used up, become obsolete, or lose its value from natural causes.
Tax law principles regarding valuation of business and non-business assets, and inventory.
Value Added Tax (VAT)
Specific types of turnover tax levied at each stage in the production and distribution process. Although VAT depends on individual consumption of goods or services, liability for VAT is on the supplier of goods or services. VAT normally utilizes a system of tax credits to place the ultimate and real burden of the tax on the final consumer and to relieve the intermediaries of any final tax cost.
Generally, a car, van, pickup truck, panel truck, or sport utility vehicle weighing 6,000 pounds or less that is considered a passenger automobile.
Doctrine which holds that differently situated taxpayers should be treated differently, i.e. taxpayers with more income and/or capital should pay more tax.
There are three multilateral "Vienna Conventions" which are relevant for taxation purposes. Among them, the Convention of 23 May 1969 on the Law of Treaties is particularly related to the interpretation of tax and other treaties. This convention contains accepted rules applying to tax treaties, the conclusion of treaties, their observance, application and interpretation, etc. There are also Vienna Conventions on Diplomatic and Consular Relations, which address taxation and other issues in that context.
Voluntary Interest Payments
Payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment.
Tax levied at source as a withholding on wages; taxes thus withheld are usually offset against final income tax liability (if any).
A stock transaction in which the person sells or trades stock or securities at a loss and, within 30 days before or after the sale, acquires substantially identical stock or securities, either directly or through an option.
Wear and Tear
Decline in value through the ordinary use of an asset. Income tax systems usually allow deductions in calculating the profits of a business using buildings, plant and machinery which are subject to wear and tear during the business.
Government document announcing government policy and practice on a specific issue or issues.
When income or goods are withdrawn from a business by the entrepreneur to his private household (without a consideration), the income or the value of such goods normally constitutes a taxable event in the hands of the recipient for income tax purposes. Similarly, a withdrawal of goods or services for private use constitutes a taxable transaction for VAT purposes in most countries using such a system.
Tax on income imposed at source, i.e. a third party is charged with the task of deducting the tax from certain kinds of payments and remitting that amount to the government. Withholding taxes are found in practically all tax systems and are widely used in respect of dividends, interest, royalties and similar tax payments. The rates of withholding tax are frequently reduced by tax treaties.
Withholding Tax Credit
Various kinds of income (such as dividends, interest, royalties) are taxed at source by requiring the payer to deduct tax and account for it to the tax authorities (abroad). The taxpayer recipient is entitled to credit the tax withheld at source against his final tax liabilities determined by (domestic) tax law of the country in which he is resident.
Funds invested in a company's cash, accounts receivable, inventory, and other current assets (gross working capital). The term usually refers to net working capital, that is, current asset minus current liabilities.
World Wide Income
Criterion for the income tax liability of a resident company or individual of a certain country. In many countries a resident company or individual is subject to corporate/individual income tax on its worldwide income, subject to double taxation relief.