We have collected a list of tax and business terms her for your assistance.
Keep in mind that the definitions are abbreviated and, as with all terms, accepted usage can vary by industry, area of the country, etc. Please feel free to call or email us if you need more information on terms or phrases we use in our meetings, documents, and transactions with you.
Qualified Terminable Interest Property (QTIP)
Property that qualifies for the marital deduction provided the property passes from a decedent to a surviving spouse, the surviving spouse has a qualified income interest for life in the property and the executor of the decedent's estate makes an irrevocable election to qualify the QTIP property for the marital deduction. REO. An abbreviation for real estate owned. Used to identify properties that have been foreclosed on and carried on the balance sheet of a lender.
Rate of Return on Assets
In real estate parlance, the net operating income from a property divided by the price of the property.
Real Estate Investment Trust
A special corporation that is generally not taxed under federal law. The trust (REIT) must invest funds in real property. Income is taxed to the shareholders.
Recapture
See Depreciation Recapture
Recharacterization Rules
Generally, rules which reclassify passive income as nonpassive. This type of income should not be reported on Form 8582 and cannot be offset by passive activity losses except those passive losses remaining after disposition of a passive activity.
Reformation
The act of changing the terms of a contract to meet the original intentions of the parties.
Registered Bond
See Bearer Bond
Release Price
The amount that must be repaid on a development loan when a property under a blanket mortgage is sold.
Renewable and Convertible Term
Term life insurance that is both renewable for an additional period without evidence of insurability and convertible into a permanent or whole life policy. A policy may contain one or both clauses.
Replacement Cost
The cost of replacing a property with one having similar amenities and functionality, but not identical improvements.
Reporting Forms
Commercial property insurance where the insurer requires periodic reports on the value of the inventory to ensure coverage is adequate and the premiums commensurate with the risk.
Reproduction Cost
The cost of reproducing the improvements on a property so as to duplicate the original property.
Residual Value
The value at the end of a term. In leasing, it's the value, either fair market value or some stated value, at the end of the lease. In finance and accounting, it's the fair market value at the end of the equipment's design or economic life or life in the business.
Revenue Ruling
This is an official IRS interpretation of the Internal Revenue Code or Regulations on a specific issue. The ruling may have been prompted by a Technical Advice Memorandum, taxpayer request, court decision, etc. As opposed to a Private Letter Ruling, a revenue ruling usually has broader implications and can be cited by the IRS or taxpayers as precedent. Revenue rulings carry less weight than IRS regulations.
Revocable Beneficiary
In the case of an insurance policy, the policyholder, in the case of a trust, the grantor, has the right to change the beneficiary at any time.
S Corporation
A corporation that is not taxed as a separate entity. Instead, the income, losses, credits, etc. are passed through to the shareholders.
Sale-Leaseback
A transaction where the owner of a property sells it to another party but retains occupancy by immediately leasing it back from the buyer. Frequently a way of raising cash or getting rid of an unwanted property.
Sandwich Lease
Where a tenant subleases part or all of his space to other tenants.
Self-Charged Interest
The portion of interest charged on a lending transaction between a flow-through entity (S corporation or partnership) and its partners or shareholders which represents a payment a person makes to himself or herself. Stated differently, it is the amount the lender/borrower reports as interest income/expense which is equal to the lender's/borrower's distributive share of the flow through entity's interest deduction. The interest payments received are generally treated as portfolio income.
Self-Rented Property
Personal or real property a taxpayer rents to an entity in which the taxpayer materially participates. For example, you rent real property you own personally to an S corporation in which you materially participate.
Seller Carry-Back
Also known as seller financing, it's where the seller provides some or all of the financing in connection with the sale of real estate or a business.
Sensitivity Analysis
An approach to taking into account risk by calculating the changes in potential returns if the original assumptions change. For example, by using your best estimates for costs and revenue you compute that a new machine will provide you with 18% return. If revenues are 10% lower, the return will be 14%.
Settlement Options
Different ways of taking the proceeds from a life insurance policy. For example, rather than receiving the proceeds in a lump sum, the beneficiary can request the insurer to pay the amount out over several years. Interest is added to the principal to reflect the delayed payout.
Short
An investor is said to be short if he has sold stock that he does not own, that is, he has sold stock he borrowed from his broker. In the case of an option, the seller or writer has a short position if he has sold the option short.
Significant Participation Activity
A business in which you participate more than 100 hours without materially participating. If the total hours of participation in your significant participation activities (SPA) exceed 500, the total net income from SPAs is treated as nonpassive.
Specific Coverage
An insurance policy or endorsement where coverage is limited to the property specified in the contract.
Specified Perils Contract
An insurance policy on real or personal property where only coverage is limited to the enumerated perils. For example, flood insurance covers only floods, no other peril.
Spendthrift Clause
A clause in a trust, insurance policy, etc. that guards the assets against unwise use by the beneficiary. In some cases the assets cannot be attached by creditors. Often used by parents to provide for children who might otherwise waste the assets or pledge them.
Standby Loan
A commitment by a lender to make a loan on specified terms. Generally, neither the potential borrower nor lender anticipate the loan will be taken down. Instead, it's anticipated it will be replaced by a permanent loan.
Straddle
Any of a number of possible investment positions where the investor owns both a put and a call or protection from a drop in the market and a rise in the market. The put and call would have both the same exercise price and the same expiration date. An investor is long in a straddle if he buys a put and a call; he is short a straddle if he writes a put and a call.
Straight Deductible
In an insurance contract, a constant amount or percentage of value which the insured bears on every loss.
Straight-Line Depreciation
Depreciation (also applies to amortization) where the amount for each period is equal. For example, annual depreciation on a $12,000 asset with a 10-year life would be $1,200 per year.
Subordination Clause
In real estate lending, a clause in a mortgage that allows it to become junior to subsequent liens.
Subrogation
The right of an insurer to substitute itself for the victim in recovering the amount of the loss from the party responsible for the loss. For example, you rent space in a warehouse. A worker accidentally sets fire to the building. The landlord collects from his insurance company but the insurer files a claim against your business.
Substantial Part of an Activity
An identifiable piece or unit of a larger activity, such as a separate division or branch, or a separate product line of a business with several lines or divisions. Generally used in connection with the passive activity loss rules.
Subvented Lease
A special lease provided by vehicle or equipment manufacturers that make it more attractive than a lease offered through regular sources. In essence, the lease is subsidized by the manufacturer.
Suspended Losses
Passive losses which are carried forward indefinitely until the taxpayer has passive income or there is an entire disposition of the activity. Also called carryover or carryforward losses.
Take-Out
Also know as a permanent loan commitment, it's a promise by a lender to replace a construction loan with a permanent one.
Tangible Asset
A physical asset such as equipment, buildings, etc. rather than an intangible asset.
Tax Deferred. A term that indicates no tax is currently due on the transaction or income received. Instead, tax is due at a later date when the transaction is closed. Earnings in an IRA account are tax deferred until you retire and the income is distributed to you. A tradein is a tax deferred transaction. You report no gain until you sell the property received in the tradein.
Technical Advice Memorandum
This is written advice issued by the IRS national office at the request of an IRS district office or Appeals Office on a technical or procedural question, usually arising during the audit of a taxpayer's return or a claim for refund. Like Private Letter Rulings these are reported to the public, but are not official IRS pronouncements. Thus, they cannot be cited as precedent.
Tenancy at Will
The occupancy of property at the will of the owner. The agreement may be written or oral, but the tenant may leave at any time without liability and the owner can evict the tenant at any time.
Term
The life of a contract, agreement, loan, etc.
Term Contracting
A technique in which a source of supply is established for a specified period of time. The contract often has an estimated or minimum quantity.
Term Insurance
A type of life insurance issued for one or more years specified in the contract. As opposed to whole life, the policy does not build any cash value.
Tiered Entities
Partnerships or trusts or S corporations invested in other partnerships or trusts or S corporations.
Treasury Inflation Protection Securities (TIPS)
These are treasury bonds where the principal is indexed to the CPI. The total yield is made up of current interest payments and semi-annual CPI adjustments to principal. While only the interest is paid, both portions are taxable. Because of the CPI adjustment, the interest rate is relatively low.
Trial Balance
A list of all the ledger accounts with their balances at any point in time.
Vacancy and Collection Loss
The reduction in potential gross income from vacancies and bad debts in real property. For example, a building has 50,000 square feet of space that should rent for $10 per square foot. The gross potential rent is $500,000 per year. However, vacancy and collection losses are projected to reduce that by $40,000 to $460,000 annually.
Valuable Papers Insurance
Insurance that provides coverage for the destruction or loss of papers that have intrinsic value.
Value-Added Tax
A tax imposed on each step in the production process. The measure of the tax is the difference between the cost of the item to the taxpayer and the price at which the item is transferred to the buyer. For example, you purchase raw materials for $100. After machine work and assembly, you sell the item for $150. The tax is levied on the $50.
Value Date
In banking parlance, the date on which the funds become available to the depositor.
Vanishing Point
The point at which premiums on a cash value life insurance policy will end. See Vanishing Premium, below.
Vanishing Premium
A provision in many cash value life insurance policies where the premium, after a certain point in time, will end with the policy remaining in force. That time is usually estimated based on the premium and the assumed rate of return.
Variable Costs
Costs that change in direct proportion to the amount of product manufactured. For example, the cost of direct materials depends on the number of units produced. Contrast with Fixed Costs.
Variable Life Insurance
A life insurance policy where the face amount of the policy is not fixed (as in whole life) but can increase or decrease based on the performance of the investments purchased by the premiums. Like whole life, premiums are constant and the policy builds cash value.
Variance
In cost accounting, it's the difference between the actual cost and the standard cost of the cost components. In financial accounting it's the difference between actual income and expenses and budgeted amounts, or between comparative statements (e.g., prior year to current year).
Vendor's Lien
Collateral for a note or credit advanced by the seller of the property.
Vertical Integration
The IRS definition is a relationship between two businesses where one supplies more than 50% of its property or services to another, or where one receives more than 50% of its property or services from the other.
Voidable
A transaction that can be annulled if one of the parties asserts a claim to do so.
Voting Stock
An interest in a corporation where the shareholder is entitled to vote. Depending on its charter, a corporation can issue voting and nonvoting stock. Preferred stock is usually nonvoting.
Voting Trust Certificate
A document representing a beneficial interest in a voting trust.
Umbrella Liability
See Excess Loss Insurance.
Unsecured Creditor
A creditor who does not have any security (collateral) for the debt he holds.
Waive
To voluntarily relinquish a right or privilege.
Waiver
In insurance terminology, a provision in the policy releasing the insurance company from liability to pay for specified losses that would normally be covered under the policy.
Waiver of Mistake or Informality
The act of disregarding errors or technical nonconformities in a bid which do not affect the substance of the bid and will not adversely affect the competition between bidders.
Waiver of Premium Provision
A provision available in many disability income and life insurance policies that allow the policy to stay in force without the payment of premiums if the insured has been disabled for a specific periof of time (typically 6 months on life insurance policies).
Warehouse Receipt
A document showing ownership of goods stored in a warehouse. The receipt can be used to transfer ownership of the goods without having to ship the actual goods to the buyer.
Warranty Deed
A deed that warrants that the seller is transferring title free and clear of any encumbrances. Should the title turn out to be defective, the buyer has recourse to the seller.
Wash Sale
A tax term describing the sale of stock or securities and the purchase of identical securities within 30 days before or after the sale. For tax purposes, any losses on the transaction are disregarded.
Watered Stock
Generally, stock that is overvalued because of accounting gimmicks or where unauthorized shares have been issued.
Waybill
Document prepared by a common carrier that provides the details of the route shipped goods are to follow.
When Issued
Refers to a security that is being traded but has not yet been formally issued. Usually reserved for new issues of stocks and bonds and stocks that have split. For example, Madison Inc. is selling for $100 per share. The stock has been split 2-for-1 but new shares have not been issued. It may trade for $50 per share (the post-split price) on a 'when issued' basis. Usually abbreviated WI in financial newspapers.
White Goods
A term used in retailing and economic measurement for large household appliances such as stoves, washers, dryers, refrigerators, etc.
White Knight
When a company is the target of a hostile takeover it may seek out another company who is more friendly to rescue it. The friendly company is known as a white knight.
Whole Life Insurance
A life insurance policy that not only pays the face amount on the death of the insured, it builds cash value because the required premiums exceed the amount necessary to provide pure insurance protection. Premiums are level throughout the life of the policy. Contrast with Term Life.
Winding Up
The processing of liquidating a company. Includes paying off creditors, selling and/or distributing assets to owners, etc.
Window Dressing
Sprucing up a balance sheet, financial statement, etc. for a monthly, quarterly, or annual report. Examples include trying to collect receivables just before the end of a quarter; booking sales at the very end of the period; in the case of a mutual fund, selling less desirable or investments with losses and replacing them with higher quality issues before the statement date.
Withdrawal Plan
In the case of mutual funds, a plan that allows shareholders to receive regular payments of income or capital gains.
Without Prejudice
A legal term indicating that an action is made without any admission or waivers. For example, where a party offers to settle a legal dispute without admitting liability.
Without Recourse
Where a creditor's only recourse in the case of default is to sell any pledged property. Also applies to the factoring of receivables, loans or notes, etc.
Wire Transfer
The transfer of money between two banks using a wire transfer system or the Federal Reserve's transfer system. Banks usually charge an extra fee for this service, but the transfer to your account is done faster, hence the funds wired from another party are available quicker than if you received the check and your bank waited for the funds to clear.
Working Capital
Amounts invested in cash, accounts receivable, inventory, and other current assets. Unless otherwise indicated, it refers to net working capital; that is, current assets less current liabilities.
Work in Process
Jobs currently being processed. Usually refers to manufactured goods where some work has been performed on the raw materials, but the goods are not yet ready for sale.
Workers' Compensation Benefits
Life and health insurance coverage for employees only while they are on the job. Medical expenses, disability income, dismemberment, and death benefits are provided under the policies. Workout. An attempt by a debtor and creditor to avoid foreclosure or bankruptcy when the debtor is in financial difficulty. The creditor often will accept less than full payment of debts in order to avoid receiving less in a bankruptcy case.
Workweek
The normal number of days and hours employees are scheduled to work for a week. In economic statistics, a measure of the economy. The longer the workweek, the more employees in general are working and is a reflection of whether employers are hiring new employees are just extending the hours of current employees.
Wraparound Mortgage
A mortgage where an existing loan (or loans) on a property are not paid off on sale, but retained, and a new loan is made. The old loans are often retained because they are at an interest rate below the current market. The new lender makes the payments on the existing loans.
Write Off
To reduce the value of an asset on a company's books to the fair market value, or fair market value less the cost of disposal. For example, a computer purchased for $5,000 and depreciated down to $3,000 is now found to be worth no more than $500. You write off $2,500 to show the asset at the current market value. Also known as write down. This procedure is generally not allowed for tax accounting purposes.
Write Up
Generally, the reverse of Write Off, above. Usually not allowed for accounting purposes.
Yearly Renewable Term
A term policy covering one year that is renewable each year without having to show insurability.
Yield
See Current Yield
Yield Curve
A graph that plots the yields of similar quality bonds on the y-axis and the time to maturity on the x- axis. Generally, the longer the time to maturity, the higher the interest rate.
Yield Equivalence
The interest rate at which a tax-exempt bond and a taxable one have the same after-tax return. The theory assumes that both bonds are of similar quality. To find the equivalent taxable yield of a tax-exempt bond, divide the tax-exempt yield by 1 minus your marginal tax rate.
Yield Spread
The difference in yields among bonds of the same maturity that's caused by differences in the quality of the bonds.
Yield to Call
Similar to Yield to Maturity but the call price and earlier call date are substituted for maturity date when calculating the yield. For example, Madison Inc. issues a bond for $1,000 at 10%. The bond matures 15 years later, but is callable at the end of 7 years at 105 ($1,050). The higher call price and the shorter term is used to compute the yield.
Yield to Maturity
A method of calculating the yield on a bond that takes into account not only the periodic interest payments and the purchase price, but also the return of principal at maturity. (See Current Yield above.)
Zero-Base Budgeting
A technique where each budget starts from zero, rather than starting with the prior budget and increasing or decreasing it. Theoretically, under zero-base budgeting, every expense has to be justified. That should foster a closer look at all expenditures.
Zero Balance Account
A checking account designed to have a zero balance. The bank transfers enough funds from an interest bearing account each day to pay all checks presented to the bank for payment.
Zero Coupon Bond
A bond that does not pay any current interest. It's purchased at a deep discount from the face value. Income results from the gradual appreciation of the bond. For example, a $100,000 zero coupon bond with 10 years to maturity with a stated interest rate of 8% should sell for $46,319. While you receive no cash interest payments, you must pay tax every year on the increase in value. Zero coupon bonds tend to be more volatile than regular bonds.
