Business Income Tax - Chapter 16

mutual fund

A diversified portfolio of securities owned and managed by a regulated investment company.

securities

Financial instruments including equity interests in business organizations and creditor interests such as savings accounts, notes, and bonds.

qualified dividend income

Dividends received from taxable domestic corporations and certain qualified foreign corporations eligible for a preferential individual tax rate.

capital gain distribution

A distribution of long-term capital gain recognized by a mutual fund to investors in the fund.

private activity bonds

Tax-exempt bonds issued by state or local governments for nongovernmental purposes such as industrial development.

Treasury inflation-protected securities (TIPS)

Long-term U.S. debt instruments with a fixed interest rate on an inflation-adjusted principal amount.

Series EE savings bonds

Long-term debt instruments issued by the U.S. government at a discount.

market discount

The excess of a bond’s stated redemption value over the price paid for the bond in a market transaction.

original issue discount (OID)

The excess of a bond’s stated redemption value over the issue price.

cash surrender value

The amount paid to the owner of a life insurance policy on the liquidation of the policy.

inside buildup

Annual increase in value of a life insurance or annuity contract.

accelerated death benefits

Payments made under a life insurance contract to insured individuals who are terminally or chronically ill.

nonbusiness bad debt

An uncollectible debt held by an individual creditor that is unrelated to the individual’s business.

reorganization

A statutorily defined transaction in which one corporation acquires another, one corporation divides into two corporations, or a corporation changes its capital structure.

short-term capital gain or loss

Gain or loss resulting from the sale or exchange of a capital asset owned for one year or less

long-term capital gain or loss

Gain or loss resulting from the sale or exchange of a capital asset owned for more than one year.

28 percent rate gain or loss

Long-term capital gain or loss from the sale or exchange of collectibles or qualified small business stock.

collectibles

Tangible capital assets such as works of art, antiques, gems, stamps, and coins.

adjusted net capital gain

Net long-term capital gain (reduced by any 28 percent rate gain or any unrecaptured Section 1250 gain) plus qualified dividend income.

maximum zero rate amount

The maximum amount of adjusted net capital gain taxed at the zero percent preferential rate.

maximum 15 percent rate amount

The maximum amount of adjusted net capital gain (in excess of any zero rate amount) subject to the 15 percent preferential rate.

unrecaptured Section 1250 gain

Section 1231 gain on the sale of business realty that would be recaptured as ordinary income under the full recapture rule.

qualified small business stock

Stock in a corporate business that meets certain statutory requirements. Individuals who recognize gain on the sale of qualified small business stock may be eligible to exclude 50, 75, or 100 percent of the gain from income.

Section 1244 stock

The first $1 million of stock issued by a corporation for cash or property. Some portion of the loss on the disposition of Section 1244 stock is ordinary to individual investors.

investment interest expense

Interest paid by an individual on debt incurred to purchase or carry investment property.

net investment income

Income from investment assets reduced by expenses directly related to the production of investment income.

passive activity

An individual’s interest in (1) an active business in which the individual does not materially participate or (2) a rental activity.

material participation

An owner’s regular, continual, and substantial involvement in the day-to-day operation of an active business.

rental activity

An activity where payments are principally for the use of tangible property for an extended period of time. Rental activities are passive activities.

unearned income Medicare contribution tax

A 3.8 percent tax on an individual taxpayer’s net investment income, the revenues from which are earmarked for the Medicare trust funds.

inter vivos transfer

A transfer of property occurring during the life of the property owner.

donor

An individual who makes a gift.

donee

An individual or organization that receives a gift.

annual gift tax exclusion

The annual amount that a donor can give to each donee that is excluded from taxable gifts.

lifetime transfer tax exclusion

The cumulative amount of transfers that an individual can make during life or at death without incurring federal transfer tax.

testamentary transfer

A transfer of property occurring on the death of the property owner.

taxable estate

The aggregate fair market value of property owned by a decedent or transferred because of the decedent’s death reduced by allowable deductions.

Property owned by a decedent and disposed of according to the terms of a valid will or state intestacy laws.

unlimited marital deduction

A deduction in the computation of a decedent’s taxable estate equal to the value of property transferred to the decedent’s surviving spouse.