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above the line
A current or ordinary expense in a financial statement. For taxes, an above-the-line deduction is subtracted from your total income to arrive at adjusted gross income (AGI) on your tax return. Above-the-line deductions are allowed whether or not a taxpayer itemizes his personal deductions or takes the standard deduction.
See also below the line and adjusted gross income.


accelerated depreciation
Depreciation is the system used to distribute the expense of an asset (property, plant, or equipment) over its estimated useful life. Accelerated depreciation is a method that deducts the cost of an asset faster than straight-line depreciation, which takes an equal deduction every year over the asset's life.


accounting method
The system used to determine income and expenses for financial statements and tax returns. The most common methods are the cash method and the accrual method.


accountable plan
Under tax rules, if an employee receives travel money from his or her employer under an accountable plan, the amount is excluded from the employee's gross income and is not subject to payroll taxes. An accountable plan requires the employee to turn in receipts to his employer documenting how money advanced to him was spent. Any excess advance must be returned to the employer, or it is included in an employee's taxable income.


accounting period
The period of time represented in a profit and loss statement; for example, monthly, quarterly, or annual income statements. For income tax purposes, businesses must choose a "tax year," the annual accounting period they use for reporting income and expenses on their tax return.


account payable
An unpaid invoice for the purchase of merchandise, supplies, and services, usually shown on a balance sheet as due within one year.


account receivable
A specified dollar amount due to you by another (typically customers), usually shown on a balance sheet as due within one year.


accrual method
An accounting method that records a sale when it is made rather than when the cash is actually received and that records an expense when it occurs rather than when it is actually paid.
See also cash method.


accrued expense
An expense and corresponding liability recorded on the books as it occurs, although the obligation will be paid at a later date. For example, recording December's wages and bonuses on the December books when the payroll is actually paid in January.


accrued income
Recording as an asset income earned this accounting period that will be received (hopefully in cash) at some later date. For example, an inventory item is sold on open account in the current accounting period, with the expectation that the money will be received at a later date.


accumulated depreciation
Depreciation is the system used to distribute the expense of an asset (property, plant, or equipment) over its estimated useful life. Accumulated depreciation is an account in the asset section of the balance sheet that shows the total amount of depreciation that has been taken on a company's combined assets as of the balance sheet date. For example, assume your company has only one building worth $60,000 on which you are taking a $2,000 per year depreciation expense. At the end of five years, the accumulated depreciation account will show $10,000. This balance is shown on the balance sheet immediately after the building account to show that the net book value, or adjusted basis, of the building is $50,000.


acid test
This is a ratio of your ready-cash items (cash, accounts receivable, and marketable securities) to your current liabilities. A higher ratio of ready cash items over current debts usually indicates a healthier company, one more likely to meet its current obligations.


active participant
A taxpayer who is covered by an employer-maintained qualified retirement plan or a qualified self-employed retirement plan. If you are an active participant for even a single day in the tax year, your traditional IRA contribution may not be tax-deductible or your deduction may be limited.
See also qualified retirement plans.


actuary
A person who calculates statistical risks, premiums, and life expectancies usually for insurance purposes.


actuarial
Having to do with the mathematics, statistics, and risk in the pension or insurance business.


adjustable rate mortgage (ARM)
A mortgage with an interest rate that changes with some predetermined index (such as the consumer price index), and at predetermined intervals.


adjusted basis
Adjusted basis is used to compute the gain or loss on the sale of an asset for income tax purposes. It generally represents the cost of the asset plus the cost of any capital improvements, minus any deductions taken, such as depreciation.
See also accumulated depreciation and cost basis.


adjustment to income
An expense that may be deducted on a tax return even if a taxpayer does not itemize personal deductions.
See also adjusted gross income and above the line.


adjusted gross income (AGI)
An income tax term meaning your gross income from all sources minus certain specified items. AGI is often used to determine other allowable tax credits and adjustments.
See also above the line.


adjusting journal entries
A bookkeeping entry to correct an error or to record such items as accrued income, accrued expenses, depreciation, bad debts, etc.


alimony
Payments made by one spouse to a former spouse under a legal separation or divorce agreement. Alimony payments are taxable income to the recipient and tax deductible for the taxpayer making the payment.


alternative minimum tax (AMT)
Think of the alternative minimum tax as a separate tax system that runs parallel to the regular tax system. The AMT requires you to adjust your taxable income to disallow certain deductions and credits allowed by the regular tax. If your AMT turns out to be higher than your regular tax computation, you pay the AMT. The law was designed to make sure that certain high-income taxpayers paid at least a reasonable amount of income tax. Because the AMT computation is not indexed for inflation, many more middle-income taxpayers are getting caught by this tax every year.


amended return
An amended income tax return allows taxpayers to correct the income, deductions, and credits reported in error or omitted on their original return. Generally, taxpayers have three years from the tax return due date, including extensions, to file an amended return.
 

amortization
A book entry to record the gradual reduction of an account value. It is most often used to describe the reduction in a debt. To amortize a debt is to make payments over a period of time. For tax purposes, certain expenses (such as loan fees) are required to be capitalized or deducted over a fixed period of time. Amortization refers to the expense deduction.


amount realized
The amount received by a taxpayer on the sale or exchange of property. It is the sum of cash, fair market value of property or services received, and the amount of debt assumed by the purchaser.


annuitant
A person who receives a pension or annuity.


annuity
A series of payments. The right to receive a series of payments over a specified time such as monthly payments for a set number of years, or a lifetime annuity which runs until the death of the recipient. A joint and survivor annuity ends on the death of the last joint owner.


APR (annual percentage rate)
The Truth in Lending laws require lenders to show you the APR. This figure takes into account the interest rate shown on the contract as well as points, fees, and any other adjustments. It is designed to show the true cost of the loan.


ARM
See adjustable rate mortgage.


articles of incorporation
Documents filed with the Secretary of State in the state where a corporation is being formed. The Articles give the name of the corporation, the incorporators, addresses, and the amount of capital stock authorized to be issued. (Your attorney would be glad to expand on this definition if you need more information.)


assessed value
The value of your property for property tax purposes, usually determined by a county assessor who assigns a separate value for land and improvements.


asset
Items you own, both tangible (real estate, vehicles, equipment, and other personal property) and intangible (patents, trademarks, etc.).


at-risk rules
The at-risk rules limit your income tax loss from an activity to the amount you could actually lose. For example, if your total investment risk in a partnership is $20,000, you are limited to a total of $20,000 of tax losses from that partnership. The rules apply to individuals, partners in a partnership, and shareholders in S corporations.


audit
In accounting, the examination of books and original documents to determine the completeness and fairness of information presented in financial reports with the intent of issuing audited financial statements. The fairness of accounting information is measured by generally accepted accounting principles (GAAP) published by the American Institute of Certified Public Accountants.


audit
In tax, an audit is an IRS or other tax jurisdiction examination of your tax return or other financial records, performed in an effort to verify whether a taxpayer is correctly reporting transactions that have tax consequences.
 

away-from-home expenses
An income tax term used in determining the deductibility of certain travel expenses. Away from home in this sense does not normally mean away from your personal residence, but rather your principal place of employment. You must be away from home for a period longer than an ordinary working day for expenses to be deductible.
 

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