Glossary of Tax and Business Terms

Adjusted Gross Income (AGI):
Your total income for the year, including wages, dividends, capital gains, and other income sources, minus allowable deductions such as retirement contributions and student loan interest.

Annual Percentage Rate (APR):
The yearly interest rate charged on loans or earned through investment. APR includes fees or other costs associated with the transaction.

Asset:
Any resource owned by an individual or business that has economic value, such as cash, real estate, equipment, or intellectual property.

Balance Sheet:
A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time, providing a snapshot of its financial position.

Business Expense:
Any cost incurred in the ordinary course of business, such as rent, utilities, or office supplies, that can generally be deducted from gross income to reduce taxable income.

Capital Gains:
The profit made from selling an asset (like stocks, real estate, or a business) for more than its original purchase price. Capital gains can be taxed at different rates depending on how long the asset was held.

Cash Flow:
The total amount of money being transferred in and out of a business, often used as a measure of liquidity and business health. Positive cash flow means a business is generating more income than expenses.

Depreciation:
The gradual reduction in the value of an asset over time. Businesses can use depreciation as a tax deduction by spreading the cost of an asset over its useful life.

Employer Identification Number (EIN):
A unique nine-digit number assigned by the IRS to identify a business for tax reporting purposes. An EIN is also known as a federal tax ID number.

Equity:
The value of ownership interest in a business, calculated by subtracting total liabilities from total assets. Equity represents the residual value to shareholders after debts are paid.

Estimated Taxes:
Quarterly tax payments made by business owners, freelancers, and individuals who do not have taxes withheld by an employer, to avoid owing a large tax bill at the end of the year.

Fiscal Year:
A 12-month period that a company uses for accounting purposes and preparing financial statements. It doesn’t necessarily align with the calendar year.

Gross Income:
The total income received before any deductions or taxes are applied. For businesses, gross income is revenue minus the cost of goods sold (COGS).

Independent Contractor:
An individual who provides services to a business or client without being considered an employee. Independent contractors must handle their own taxes, including self-employment tax.

Liabilities:
Financial obligations or debts owed by a business, such as loans, accounts payable, or mortgages.

Limited Liability Company (LLC):
A business structure in the U.S. that provides its owners (called members) with limited liability protection, meaning personal assets are protected from business debts, while also offering flexible tax options.

Net Income:
The amount of profit remaining after all expenses, taxes, and costs have been deducted from total revenue. Also known as the bottom line or net profit.

Pass-Through Entity:
A business structure (like an LLC, S-Corp, or partnership) where profits and losses are passed through to the owners' personal tax returns, avoiding corporate income tax.

Payroll Taxes:
Taxes that employers withhold from employees’ wages and pay to the government, including Social Security, Medicare, and unemployment taxes.

Profit and Loss Statement (P&L):
A financial report that shows a company’s revenues and expenses over a specific period of time, providing insight into whether the business is profitable.

Return on Investment (ROI):
A measure of profitability that calculates the percentage return on a particular investment relative to its cost.

Self-Employment Tax:
A tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. For 2023, the self-employment tax rate is 15.3%.

Sole Proprietorship:
A type of business owned and operated by one individual where there is no legal distinction between the owner and the business.

Tax Credit:
An amount of money that taxpayers can subtract directly from the taxes they owe. Tax credits are more beneficial than deductions, as they reduce tax liability dollar-for-dollar.

Tax Deduction:
A reduction in taxable income that lowers the amount of tax owed. Common deductions include mortgage interest, charitable contributions, and business expenses.

Withholding Tax:
The portion of an employee’s wages withheld by the employer and sent directly to the government as partial payment of income taxes.