Operating a business or side hustle can be demanding! The tax jargon for self-employed and small business owners can be a little overwhelming, so let’s take a moment to review with this useful glossary of terms related to business finance and taxes that you might encounter this tax season.

1. Assets

A business asset is something valuable that you use for your business operations. It may be your available cash, goods you sell on eBay, property, equipment for your business, etc.

Generally speaking, assets are separated into two groups: tangible and intangible. Intangible assets are non-physical objects like licenses or trademarks, whereas tangible assets are things like machinery or structures.

2. Business losses

You have a business loss if your operating costs are more than your earnings. When establishing a business, losses are typical, so if you’re a side hustler or new small business owner and finding it difficult to turn a profit, don’t give up.

The good news is that you can write off a portion of your business losses on your tax return, however there are some restrictions to be mindful of.

3. Business revenue

Business income and business revenue are not the same thing. The total amount of money your company makes from sales after deducting all costs is known as revenue.

4. Business income

Your business income is the sum of your previously mentioned business revenue less operating expenses such as taxes, depreciation, interest, and so forth.

Depending on the nature of your business, you may need to file your business income on several tax forms. A useful document from the IRS describes business income for various business forms, such as corporations, partnerships, and sole proprietorships.

5. Capital gain

A profit you make from the selling of an asset, like real estate or investments, is known as a capital gain.

There are two types of capital gains: long-term and short-term. It is regarded as a long-term capital gain if you owned the asset for more than a year before selling. It is referred to as a short-term capital gain if you held the asset for less than a year before selling.

Depending on your income, the long-term capital gains tax rate is either 0%, 15%, or 20%. As a result, long-term gain rates are often better than short-term rates, which are subject to regular income tax (your tax bracket determines the rate you pay). You can report capital gains (and losses) on your tax return using Schedule D.

6. Capital loss

When you sell a capital asset for less than its adjusted basis, which is usually its initial purchase price, you are experiencing a capital loss. This is not the same as a typical business loss, which occurs when operating costs are higher than revenue.

Like with a capital gain, capital losses are reported on Schedule D. You will deduct any long-term losses from long-term gains when reporting. Reconciliation is the process that lets you figure out if you made money or lost money.

Capital losses are deductible to the extent of your capital gains plus $3,000 ($1,500 if filing separately if married). Capital losses over this cap might be available for utilization in subsequent years.

Additionally, you can write off your $6,000 net loss. But the IRS will only let you write off up to $3,000 in net capital losses annually (or $1,500 if you’re married and filing separately). This implies that you could write off $3,000 of your taxes this year and save the remaining $3,000 for the following year. The $3,000 that you carried over can also be used to offset any capital gains you make the following year. After that, you can keep carrying over and deduct the maximum amount every year until all of your excess losses are covered.

7. Cost basis

Your cost basis consists of the price you paid for an asset plus any additional expenses you incurred in order to acquire it. If you would want more information on this subject, the IRS provides a useful booklet that goes over what can be included in cost basis.

Let’s consider a scenario where you bought a stock two years ago for $75 and sold it today for $100. Your cost base would be $75 in this case. In order to calculate your capital gain, you must be aware of your basis. Subtract the basis of your item from the total sale price to achieve this. Your taxable capital gain in the aforementioned scenario would be $25.

8. Cost of goods sold (COGS)

Your COGS, often known as “cost of sales,” is the total of all the direct expenses related to making your goods. Costs associated with labor, delivery, and any materials required to make the goods are a few examples. The costs associated with marketing, for example, are not included in your cost of products sold.

Simply deduct your cost of goods sold (COGS) from your sales income to find your gross profit. To learn more about gross profit, continue scrolling!

9.Depreciation

An asset that depreciates in value with time loses value more quickly. By deducting it from your taxes, tax depreciation enables you to recover a portion of that value loss.

The subject of what can be depreciated might be complicated and perplexing. Do not hesitate to seek the advice of a tax expert if you are unsure if an item you own is eligible for tax depreciation. They can assist you in identifying potential losses to include on your federal income tax return. If you would like to learn more about depreciation, the IRS also provides a useful section on the subject.

10.EIN

The employer identification number is abbreviated as EIN. Consider this number to be your company’s Social Security number. The IRS utilizes this registration number to identify your company for taxation purposes. You can apply for an EIN from the IRS if your company qualifies for one.

11. Expenses

The required expenditures you incur while running your firm are known as business expenses. This can pay for anything from your business building’s rent and utilities to the expenses you incur for travel and meals while on business travels. Fortunately, they are company expenses that you may write off on your tax return!

It’s critical to distinguish between company and personal spending. The expenses you incur for non-business-related items are considered personal expenses. This includes anything you buy for yourself or your family on a personal basis, such as groceries and clothes.

It’s critical that you maintain financial segregation between your personal and commercial affairs because personal costs are not deductible on your income tax return.

12.Fair market value

The present value of an asset on the open market is its fair market value. It can assist you in appropriately pricing your products and services, and it’s occasionally required when selling specific kinds of commodities, such as collectibles or inherited goods.

13. Form 1099.

There are various types of 1099 tax forms, which are used to report various types of payments you received during the year. Let’s look at some common ones:

• a 1099-K for 2024 will be sent to you if you received at least $5,000 in payments from credit cards or third-party payment networks (like PayPal® or Venmo®). If you sell things online and make more than $5,000, you should expect to receive one of these forms this year.
• a 1099-NEC will be sent if you received at least $600 in compensation other than employee wages, such as contract work or freelance work.
• a 1099-MISC will be sent if you received at least $600 in rent or royalty payments during the tax year.

A payment made to you will be recorded on the relevant Form 1099 if backup withholding applied. For the withholding that was taken out of your paycheck, you must include this 1099 with your income tax return in order to receive credit. Since these 1099 forms are informational, you should utilize them in conjunction with your own records to determine your taxable income with accuracy.

14. Gross profit

The amount you make after deducting the cost of goods sold (COGS) is known as your gross profit. You would deduct your cost of products sold from your sales (also known as your revenue) to find your gross profit. Gross revenues is another term for gross profit.

Only your company’s cost of items sold is included in gross profit; indirect costs like marketing, insurance, and sales are not included.

15. Net Income

In contrast to gross profits, net income, also known as net profit, accounts for all expenditures associated with running your business, such as marketing and insurance.

The profit your company makes after deducting all of its operating costs is known as net income. In the end, your net income is what counts in determining whether your company is profitable. Your net income is subject to taxation as well. The manner in which you declare your net revenue will vary based on the type of seller you are.

16. Third-party network transactions

This is a term that appears on a tax form 1099-K that you may get. Any transaction handled through a third party, such as payments you receive through apps like Venmo, Cash App®, or similar ones, is referred to as a third-party network transaction. Comparably, payments made to you using credit or debit cards are known as payment card transactions, and they frequently happen via apps like Square®.

The bottom line

For both novice and seasoned business owners, navigating the complexities of corporate finance and tax jargon can be difficult. However, in order to correctly manage your finances and adhere to tax laws, you must comprehend these words. Understanding the meanings above can help you make more educated decisions that will support your company’s growth and financial stability this year and in the years to come. You can also better prepare for tax season.