Tax Glossary

A corporation that elects S status in order to receive tax treatment similar to that of a partnership.

The estimated value of an asset at the end of its useful life. Salvage value is ignored by ACRS and MACRS rules.

Depreciable property used in a trade or business and held for more than a year. All Section 1231 gains and losses are netted; a net gain is treated as capital gain, a net loss as an ordinary loss.

A deduction allowed for investments in depreciable business equipment in the year the property is placed in service.

Deferred compensation plan set up by a state or local government, or tax-exempt organization, which allows tax-free deferrals of salary.

An individual who operates a business or profession as a proprietor or independent contractor and reports self-employment income on Schedule C.

Tax paid by self-employed persons to finance Social Security coverage. In 2007, there are two rates. A 12.4% rate applies to a taxable earnings base of $95,700 or less and a 2.9% rate applies to all net earnings.

Return filed by a married person who does not file a joint return. Filing separately may save taxes where each spouse has separate deductions, but certain tax benefits require a joint return.

Sale of borrowed securities made to freeze a paper profit or to gain from a declining market.

A tax year of less than 12 months. May occur with the startup of a business or change in accounting method.

Gain or loss on the sale or exchange of a capital asset held one year or less.

IRA-type plan set up by an employer, rather than the employee. Salary-reduction contributions may be allowed to plans of small employers set up before 1997.

A fixed deduction allowed to taxpayers who do not itemize deductions. The amount depends on filing status, age, and blindness.

A fixed rate allowed by the IRS for business auto expenses in place of deducting actual expenses.

Certain employees, such as full-time life insurance salespersons, who may report income and deductions on Schedule C, rather than on Schedule A as miscellaneous itemized deductions.

A distribution of additional shares of a corporation’s stock to its shareholders.

A right to buy stock at a fixed price.

Taking an offsetting investment position to reduce the risk of loss in a similar investment.

A method of depreciating the cost of a depreciable asset on a pro rata basis over its cost recovery period.