Small Business Taxes & ManagementTM--Copyright 1999-2013, A/N Group, Inc.


For your benefit we've included a brief definition of selected business, tax, financial and real estate terms. Keep in mind that the definitions are abbreviated and, as with all terms, accepted usage can vary by industry, area of the country, etc.



Naked Position. An investor is said to hold a naked position if he holds only a stock, bond, put, call, etc. If he holds both the underlying asset and a put, call, etc. he is said to have a hedged position.

Named Nonowner. A policy designed to protect nonowners who drive an uninsured vehicle.

Name Schedule Bond. A fidelity bond that covers only the persons listed.

Narcotics-Related Financial Crimes. Crimes involving tax and money laundering related to narcotics and drug trafficking.

Negative Amortization. A situation where the outstanding principal on a loan increases because debt service payments are insufficient to cover even all the interest, and the unpaid interest is added to the principal amount.

Negative Assurance. A report by a CPA stating, based on certain limited procedures, that nothing has come to the attention of the accountant that would indicate the financial information in certain statements is not presented fairly.

Net Assets. Simply the excess of assets over liabilities of an entity.

Net Capitalized Cost. In leasing, it's the price of the vehicle after deducting manufacturer's discounts, dealer participation allowances, and cap cost reduction (down payment) from the manufacturer's suggested retail price.

Net Operating Income. In real estate parlance, it's gross income less operating expenses but before items such as debt service, brokerage commissions, tenant improvements, and other capital items.

Net Lease Property. Property where the tenant or lessee pays most, if not all, of the expenses. The tenant may pay the expenses directly, or reimburse the landlord. If the tenant is responsible for all the expenses, the lease is often called triple net or NNN. For tax purposes, a net lease is where the deductions allowed solely by reason of IRC Sec. 162 (general business expenses) are less than 15% of gross rents from that property or property where the lessor is either guaranteed a specific return or is protected in whole or part against loss of income. Deductions allowed solely by reason of Sec. 162 are deductions other than interest, taxes and depreciation.

Net Rising Index. Abbreviated NRI it's a measure of expansion or contraction related to an industry, statistic, etc. It's computed by subtracting the percentage of those polled with a negative outlook from those polled with a positive outlook. Thus, if 50% of the individuals believe things are getting better and 50% think they are getting worse, the index would be 0, or neutral.
Net Sales. Sales based on the gross invoice amount less returns, allowances, discounts and any other adjustments.

Nonfiler. A taxpayer who has not filed required tax returns.

Nonqualified Retirement Plan. Nonqualified plans are designed to provide benefits to company owners, executives, and highly compensated employees. Unlike qualified plans, nonqualified plans are not required to cover rank-and-file employees, and neither the amount that can be contributed to the plan nor the amount of benefits that they can pay are limited by law. Because nonqualified plans are not required to meet the standards set in law for qualified plans, they do not receive the preferential tax treatment that is accorded to qualified plans. Moreover, any assets that are set aside to prefund benefits under a nonqualified plan are subject to the claims of the plan sponsor's creditors in the event that the plan sponsor enters bankruptcy.

Nonmanufacturing Costs. Costs not related to the manufacture of a product.

Nonpassive Activity. A trade or business in which the taxpayer materially participates, that is, on a regular continuous, and substantial basis. Losses can be deducted without limitation as to the passive loss rules. Income cannot be offset by passive losses, except those passive losses remaining after disposition of a passive activity.

Nonprobate Property. Property owned by a decedent or in which the decedent had an interest on the daste of his or her death which passes to an heir by provisions other than a will or the laws of intestacy. That can include assets held jointly or by a trust, life insurance not payable to the estate, etc.

Nonrecourse Loan. A loan where the debtor does not assume personal responsibility for the loan. CAUTION. Such a loan has special tax implications.

Notice as Soon as Practicable. A clause in an agreement that requires one party to give notice to the other party as soon as practical, relative to all the circumstances.

Notice of Claim or Suit. A provision in an insurance policy that requires the insured to forward to the insurer immediately all notices received by the insured.



Occupancy Level. The percentage of units or square feet in a building, complex, neighborhood, etc. that is currently rented.

Office Burglary and Robbery Policy. An insurance policy for businesses that have no stock or merchandise for sale; the policy only covers the contents of the office.

Office Personal Property Form. An insurance policy that covers all risks related to occupancy of an office for physical damage.

Open-End Contract. A contract in which the quantity and/or duration is not specified.

Open-End Lease. A lease in which the lesse assumes the risk for depreciation at the end of the lease. That is, if the equipment is worth less at the end of the lease than the residual value set at the beginning of the lease, the lessee must pay the difference.

Open-End Mortgage. A mortgage where the amount that can be borrowed with the property as security can be increased, i.e., there is no fixed amount of principal.

Open Listing. A listing of property for sale given to any number of brokers where the only liability that exists is to compensate the broker who first secures a ready, willing and able buyer.

Open Mortgage. A mortgage that has matured but has not been fully satisfied or one that is overdue. As a result the property is subject to foreclosure.

Open Order. An order to buy securities that is still outstanding, i.e., it has not been filled, exercised or canceled. Also known as a good-till-canceled order.

Operating Expense. In real estate, the costs to maintain a property excluding depreciation, interest and financing costs, and income taxes.
Opportunity Cost. The cost of not doing something. For example, if your business has excess cash and uses it to purchase an item of equipment, the opportunity cost is the interest you would have earned had that money been earning interest in say, a money market account.

Optimal Capacity. The level of production that produces the lowest cost per unit.

Option Premium. The amount paid for an option.

Option. The right to buy (or sell) or lease a property at a certain price for a limited period of time. For example, you pay $2,000 for a option to purchase 20 acres of land for $200,000. The option expires in one year. Depending on the terms, you may or may not be able to sell the option.

Oral Contract. An oral agreement, i.e., not one set down in writing. Oral agreements are generally valid (although dangerous) for most transactions. Real estate is an important exception. Oral agreements related to real estate transactions are generally unenforceable. Real estate transactions include not only the actual purchase of the property, but also leases, options to purchase, etc. A oral lease for less than a year may be enforceable.

Order Paper. A negotiable instrument that is payable to a named person or that person's assignee. The payee must be specified; it cannot be made to cash or bearer.

Ordinary Court of Business. Refers to the usual practices of business transactions and to activities normal to the business. For example, goods purchased at retail are assumed to be new and in saleable condition unless specified or sold by a dealer in used items.

Ordinary Loss. A loss that reduces ordinary income for tax purposes in contrast with a capital loss which can only be used to offset capital gains. The sale of equipment used in a trade or business at less than its adjusted basis usually produces an ordinary loss.

Organization Cost. Costs and fees incurred in setting up a business entity. Usually includes legal fees for filing and minutes of organization meeting, filing fees with a state (and agency, if required), accounting costs, expenses for temporary directors and organizational meetings, etc. These are generally not deductible for accounting or tax purposes, but may be deductible under special provisions.

Original Cost. The initial cost of acquiring an asset. Contrast with adjusted basis which is the cost of property plus additions less depreciation.

Origination Fee. Borrower's costs of securing a mortgage or other loan. The costs include credit checks, appraisal, legal fees, title search, etc.

Out-of-the Money. In options, it means the current exercise of the option would produce a loss. Thus, a call option is out-of-the-money if the current price of the asset is less than the exercise price; a put option is out-of-the-money if the current price of the asset is more than the exercise price.

Overage Rent. Additional rent usually based on a tenant's sales. Such an agreement usually contains one or more breakpoints. For example, you rent space in a mall. The lease calls for you to pay 3% of all sales above $500,000. In 1998 your sales are $700,000. You owe the landlord $6,000 (3% of $200,000). Also referred to as Percentage Rent.

Overhead Costs. Costs related to manufacturing that are not Direct Costs (i.e., materials, direct labor and variable overhead). Overhead costs include fixed, variable, and semivariable costs.

Overimprovement. Where improvements made to real estate such that the appraised value of the property is less than the total cost. For example, you purchase property in a residential area for $50,000 and put up a $650,000 home where most of the homes sell for no more than $350,000. As a result, the house appraises for $575,000, some $225,000 less than the total cost.

Owner's Equity. The amount of an owner's interest in an entity that is at-risk should the company become bankrupt. In the case of a corporation, it consists of capital stock, additional paid-in capital, and retained earnings. Capital stock may be par value or no par value. If par value, the total capital stock is equal to the number of shares outstanding times the par value. Additional paid-in capital is additional amounts paid for the stock over an above the par value. Retained earnings come from the net profits of the corporation. Profits increase retained earnings, losses and distributions decrease them.

Example--Madison Inc. issues 200 shares of its common stock to Fred Flood for $60 per share, for a total of $12,000. Madison's common stock has a par value of $0.50. On the balance sheet the transaction would be recorded as capital stock of $100 (200 shares times $0.50 par value), and additional paid-in capital of $11,900 (the difference between the amount received for the stock and the par value).

Assume further than Susan Newly buys 200 shares the following week for $70 per share ($14,000 total). The capital stock amount is the same ($100), but now the paid-in capital amount is increased by $13,900.



P.I.T.I. Payments that cover Principal, Interest, property Taxes, and Insurance.

Parol Evidence Rule. Provides that the formal, written contract governs the parties. Statements made before the drafting of the policy can not be used in evidence.

Partial Release. A mortgage provision allowing a portion of the property pledged to be freed from continuing to serve as collateral.

Participation. Where two or more lenders share in a mortgage loan. Often used on large loans to spread the risk.

Passive Activity. For taxes, rentals, regardless of participation and trades or businesses where you do not materially participate. Losses are limited to passive income plus a special $25,000 allowance for rental real estate.

Passive Loss. Loss from a passive activity, that is, rental or trade or business in which you do not materially participate.

Passive Income. Income from a passive activity. In other words, income from rentals or businesses in which you do not materially participate.

Payback Period. The length of time it will take for an investor to recoup his cash outlay. Often used as a quick way to analyze an investment, usually in personal property. For example, a new machine will cost you $10,000. It will generate income before depreciation of $3,000 the first year; $4,000 the second year and $3,000 the third year. The payback period is 3 years.

Period Costs. Expenses related to a particular accounting period.

Performance Bond. A contract of guaranty by a successful bidder to protect the buyer from loss due to the bidder's inability to complete the contract as agreed.

Personal Articles Floater. Generally, an endorsement on an insurance policy that provides for all-risk coverage on scheduled (named) valuable personal property.

Personal Property. Generally, tangible and intangible assets other than buildings, leasehold improvements, land, etc. The tax law often limits personal property to physical assets such as equipment, furniture, etc. that can be moved without affecting a building or other structure.

Personal Property Floater. Generally, an endorsement on an insurance policy that covers all property individually owned no matter where it's located.

Personal Property Replacement Cost Endorsement. A provision in an insurance policy that changes the recovery from an actual cash value basis to a replacement cost basis.

Placed in service. Strictly a tax term. You can only start depreciating property (or take a Sec. 179 expense election) when the property is 'placed in service.' That means when the property is available for use in its assigned function. For example, you purchase a machine in 2006 and it's not delivered until 2007. Even though you may have paid for the machine in 2006, you can't begin depreciation until 2007. Similarly, if the machine is delivered in 2006, but the technicians didn't arrive to install and test the machine until 2007, you can't begin depreciation until 2007.

Points. Payments to secure a loan, stated as a percentage of the borrowed amount. For example, 2 points is 2% of the loan.

Policy Face Amount. The maximum amount payable under an insurance policy, so-called because the amount is printed on the face of the policy.

Portfolio Income. Interest, dividends, royalties, and gains from the sale of stocks and bonds as well as other investment activities. Portfolio income is generally not considered passive income. Portfolio income cannot be offset by passive losses except those passive losses remaining after the disposition of a passive activity.

Power of Sale. A clause in a mortgage or similar instrument that gives the lender the power to sell the property in case of a default. The property must generally be sold at auction, but the lender does not have to go through a court proceeding to do so.

Percentage Rent. See Overage Rent.

Prepayment Privilege. The right to prepay a mortgage without penalty.

Price At The Time of Delivery. A term used in sales contracts when market prices are so volatile that a vendor will not give a firm price or use an escalator clause but will only agree to charge the price charged other customers for similar purchases on the day he ships or delivers the goods.

Price Protection. An agreement by a vendor with a purchaser to grant the purchaser any reduction in price which the seller may establish prior to, or within a certain time after, shipping of the purchaser's order.

Primary Investigation. An evaluation of an allegation that an individual or entity is in noncompliance with the tax laws and related financial crimes.

Prime Costs. Direct labor and material costs.

Private Letter Ruling. These are written pronouncements from the IRS interpreting the Internal Revenue Code with respect to a specific set of facts and circumstances. Letter rulings arise from a taxpayer's request to interpret the law, usually before engaging in a transaction. For example, when two corporations decide to merge, they typically request a letter ruling to insure the transaction will be tax free. The ruling applies only to the taxpayer requesting it and cannot be cited as precedent. However, letter rulings often give important insight into the way the IRS would rule under similar circumstances. Despite the filing fee and legal costs involved in obtaining a ruling, if the tax consequences are substantial, a ruling is often advisable.

Private Limited Partnership. A partnership that does not have to be registered with the SEC, but can have no more than 35 accredited partners.

Private Placement. Also known as a private offering, the sale of an investment or business to a small group of accredited investors that conforms to certain exemptions from registration with the SEC.

Processing Year. Refers to the year in which taxpayers file their tax returns. Generally, returns for 2007 were processed during calendar year 2008. Returns for older years were also processed in 2008.

Pro Forma. Generally, financial information that reflects a hypothetical or projected transaction. For example, reconstructing a balance sheet or income statement to reflect the effects of a loan. (The loan will increase assets and liabilities and interest expense.) Also used to describe projected financial statements in general.

Pro Rata Liability Clause. When more than one insurance company covers a property, the clause provides a formula for sharing liability among the companies.

Probate Property. Assets owned by the decedent in his or her name alone or as tenant in common on the date of his or her death that pass by will or the laws of intestacy to another party. (Property in trusts, payable-on-death accounts, named beneficiaries, etc. generally do not pass through probate.

Publicly Traded Partnership. A partnership whose interests are traded on an established securities market or are readily tradable on a secondary market.

Purchase Money Mortgage. A mortgage made by the seller to a buyer. Often a junior mortgage used in connection with the sale of investment property or a business where the buyer can't meet the full purchase price through his own and borrowed funds.



Qualified Retirement Plan. A plan that meets requirements specified in the Internal Revenue Code with respect to eligibility, participation, and benefits is qualified to receive preferential tax treatment. Specifically, in a qualified plan (1) the employer can deduct from income the amount that it contributes to the plan as a business expense, (2) the amount that the employer contributes to the plan on behalf of plan participants is not treated as income to the participants, and (3) the investment earnings of a qualified pension trust are not taxed as income to either the employer or the plan participants. A qualified retirement plan may be either a defined benefit plan or a defined contribution plan. Assets held in trust by a qualified retirement plan are protected from creditors' claims if the plan sponsor enters bankruptcy.

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.

Questionable Refund Program. An IRS multi-divisional program designed to identify fraudulent returns, stop the payment of fraudulent refunds, and refer identified fraudulent refund schemes to the IRS field offices.

Quick Assets. Consists of cash and assets that are readily convertible into cash. That includes marketable securities, accounts receivable, etc. Another definition is current assets less inventory.

Quick Ratio. Also called the acid-test ratio, it's equal to the sum of cash, short-term investments and net current receivables divided by current liabilities. It's a measure of whether or not the business could pay all its current liabilities if they came due immediately.

Quick Sale Value. A lesser amount than the fair market value of a property, it reflects the amount the property could be sold for in a forced sale. When used by the IRS it usually means an amount equal to 80% of the fair market value of the property.



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, above.

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.

Referred for Prosecution. Asubject investigation that resulted in the determination of prosecution potential referred to the Department of Justice or to a U.S. Attorney's Office. (Can also apply to other jurisdictions.

Reformation. The act of changing the terms of a contract to meet the original intentions of the parties.

Registered Bond. See Bearer Bond, above.

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.

Return Delinquency Program. An IRS program that identifies and addresses taxpayers who have not filed a tax return by the return due date.

Return Preparer Program. An IRS program that pursues unscrupulous return preparers who knowingly claim excessive deductions and exemptions on returns prepared for clients.

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.

Revocable Trust. A trust, generally to hold income producing property, that may be changed or revoked at the will of the grantor. The grantor (person creating trust and transferring property to it) receives and is taxable on any income from the property, but the property passes directly to the beneficiaries on the death of the grantor. The assets pass to the beneficiaries without going through probate. While not part of probate, since the trust is revocable, the assets are part of the decedent's taxable estate.

Revolving Credit. In commercial lending, an agreement between the creditor and debtor allowing the borrower to draw down funds up to a stated maximum for a stated period. In addition to interest on the outstanding amount, the lender usually charges a fee to make the funds available. Any amount repaid allows the borrower to draw down additional funds up to the maximum.

Right of First Refusal. The option of a party to obtain a property on the same terms as another party in contract for the property as long as the terms are matched before execution of the contract.

Right of Survivorship. In jointly held property, the right of one owner to automatically take title to the property on the death of the other owner.

Right of Way. The right to use a portion of another's land to access your property or the right of a government, utility, etc. to use a portion of a property for a road, power line, etc.

Right to Return. Buyer's option to return an item for a full refund of the purchase price.

Risk Transfer. The shifting of risk from one party to another. The purchase of insurance is one example of transferring risk. Since there is an opportunity for tax evasion in risk transfer, the IRS may scrutinize such transactions.

Roll Down. The act of moving from one option position to a different one having a lower exercise price.

Roll Forward. The act of moving from one option position to a different one having a later expiration date.

Roll Up. The act of moving from one option position to a different one having a higher exercise price.

Round Trip Trade. The purchase and sale of a stock, commodity, etc. in a very short period of time.

Rule of 72. Formula for determining the time it will take for your money to double for a certain compound interest rate. Divide 72 by the interest rate in percent; the result is the number of years. For example, 72 divided by 10% equals 7.2. The actual number of years it will take your money to double at 10% is about 7.28 years.

Run of Paper. In advertising it's the positioning of an ad in a newspaper, magazine, or other media at a place determined by the publisher, as opposed to a spot selected by the advertiser.

Run With the Land. A restriction such as an easement or a right such as a right of way that applies to the land for the current and all future owners.



S Corporation. A corporation that is not taxed as a separate entity. Instead, the income, losses, credits, etc. are passed through to the shareholders.

Safety Margin. The excess of actual sales over the breakeven sales level over a specified time period. For example, the breakeven sales level is $50,000 a month; monthly sales are $65,000. The safety margin is $15,000. 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.

Sales Journal. The book of original entry were credit sales are posted to the accounting records.

Sales Returns and Allowances. Sales are generally recorded at gross, not the amount reduced by returns for unsuitable, defective merchandise, etc. The dollar amount of return is posted to an account known as sales returns and allowances, which reduces sales to produce net sales.

Sandwich Lease. Where a tenant subleases part or all of his space to other tenants.

Schedule of Accounts. A report listing details on purchased accounts purchased by a factor.

Seasoned loan. A loan on which a certain number of payments have been made collected, providing some indication of the stability of the borrower.

Second mortgage. A mortgage that's subordinated to a first mortgage. The second mortgage can be used to reduce the cash downpayment of a buyer or could be taken out after the original purchase to finance improvements. Because the loan is subordinated and involves greater risk, the interest rate is generally higher than on a comparable first mortgage. Sometimes called a junior mortgage.

Section 8 Housing. A dwelling that's privately owned and rented under the low-income rental assistance program under Section 8 of the 1937 Housing Act. The landlord receives a portion of the asking rent from a qualified low-income tenant and the remainder through a subsidy from the government.

Seed Money. The initial contribution by a venture capitalist or angel for financing a start-up business. It can be equity capital, but is usually a loan or convertible debt.

Segment Margin. The profitability of a specific portion of the business rather than the business as a whole. The segment can be a product line, division, geographic area, group of stores, etc.). The accuracy of the measure depends importantly on how operating expenses are traced to that segment.

Segregation of Duties. The concept of separating the duties and responbilities of employees so as to insure no individual can both perpetrate and hide irregularities. For example, the same person who posts receipts should not be in control of depositing funds; a person who has control over writing checks should not be assigned to reconciling the checkbook.

Self-Amortizing Mortgage. A mortgage where the periodic payments of interest and principal will automatically retire the debt at maturity. Contrast with an interest-only or balloon loan where there will be remaining principal at maturity.

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-Directed IRA. An IRA account that is actively managed by the owner. The owner designates a custodian to consummate the transactions.

Self-Rented Property. Personal or real property a taxpayer rents to an entity in which the taxpayer materially participates. 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.

Semivariable Costs. Expenses that have both a fixed and variable component.

Senior Refunding. The substitution of a loan maturing in 5 to 12 years with a loan maturing in 15 or more years. Often used to consolidate multiple loans or to extend the maturity date.

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%.

Servicing. The functions of billing, collecting payments, filing reports and documents, etc. for a mortgage loan. While a bank or other financial institution may hold the mortgage, it may delegate these functions to a specialist.

Setback. The distance from the curb, street, or other designated line to the nearest point at which a building may be erected.
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.

Set-Up Sheet. Statement containing cash flow information about a rental property given to prospective buyers. Also known as an Annual Property Cash Flow Statement.

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.

Short-Form. A legal instrument that references a more detailed document. The short-form rather than the full document is recorded.

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.

Simple Interest. Interest that is computed solely on the principal balance, ignoring previously accrued interest not paid.

Sinking Fund. An account used to accumulate funds for a particular purpose, often to retire debt, sometimes to fund the purchase of personal or real property. Some bonds require the borrower to put money in a special fund for the purpose of retiring bonds.

Soft Money Loan. Financing, often by the seller of a property, where only credit, not cash is provided.

Special Agent. When referring to the IRS, a division law enforcement employee who investigates potential criminal violations of the tax laws and related financial crimes.

Specific Coverage. An insurance policy or endorsement where coverage is limited to the property specified in the contract.

Specific Performance. An action to compel a perty to carry out the terms of the contract. In real estate transactions that usually requires the seller to deliver the property since land is considered unique and no other remedy would sufficiently compensate the buyer.

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.

Straw Man. A person or entity that purchases property and immediately conveys the property to a third party. The intention of the transaction is to conceal the identity of the true buyer.

Strike Price. The price per share at which the owner of a call option can purchase the underlying shares or the price per share at which the owner of a put option can sell the underlying shares. The strike price is also known as the exercise price.

Strip. In bond parlance it's the act of separating the income feature from the principal. Often these are sold separately. Zero-coupon securities are often the principal portion of a regular bond. (Some bonds are prestripped.) With respect to an option contract, a strip is a contract consisting of two put options and one call option on the same underlying shares. All the options have the same expiration date and strike price.

Subject Seizure Investigation. An IRS investigation to locate and seize assets that are subject to seizure and forfeiture under various tax laws.

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.

Target Normal Cost. Under the Pension Protection Act, a defined benefit plan's target normal cost for a year is the present value of benefits expected to be accrued in the current year, including benefits that are attributable to increases in compensation.

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.

Trade Discount. A discount provided by a vendor to a customer if payment is received by a certain date before the due date. For example, 2, 10 net 30 indicates the invoice is due in 30 days, but the customer can receive a 2% discount if the invoice is paid within 10 days.

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.



UCC-1. Financing statement filed with the Secretary of State or county clerk's office used to perfect a lien on debtor's assets. UCC-2 is used to show an assignment, release or change in UCC-1. UCC-3 is used to terminate a UCC-1.

Underreporter. A taxpayer who fails to report all of his or her income for income tax reporting purposes.

Umbrella Liability. See Excess Loss Insurance.

Unseasoned. A loan, lease, or other long-term obligation on which few payments have been made.

Unsecured Creditor. A creditor who does not have any security (collateral) for the debt he holds.



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.



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.



Yearly Renewable Term. A term policy covering one year that is renewable each year without having to show insurability.

Yield. See Current Yield, above.

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. When the yield on long-term bonds is less than that on shorter maturities, the yield curve is said to be inverted.

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.

Example--A tax-exempt bond is yielding 6%; your marginal tax rate is 31%. One minus .31 is .69. Divide that into .06; the result is .08695, or 8.7%. Thus, a 6% tax-exempt yield is equivalent to an 8.7% fully taxable yield.

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.


Copyright 1999-2013 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536

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--Last Update 02/12/13