Tax Tips, Entities & Incentives – Lecture Vocabulary

These vocabulary flashcards distill key entities, rules, deductions, credits, and planning concepts discussed in the lecture so you can quickly recall definitions and apply them on your exam.

Limited Liability Company (LLC)

An entity of choice for asset protection that can elect to be taxed as a sole proprietorship, partnership, C-corporation, or S-corporation, giving great flexibility.

Entity Election

The formal process (e.g., checking a box on an IRS form) by which an LLC chooses its tax classification; if not made, the IRS selects one by default.

Sole Proprietorship

A single-owner business whose profits and losses are reported on the owner’s personal return; the default status for a single-member LLC that makes no election.

Partnership

A multi-owner business that files its own informational return but passes income or loss through to partners; default status for multi-member LLCs without an election.

C Corporation

A corporation that pays its own income tax; owners are taxed again on dividends they receive (double taxation).

S Corporation

A corporation or LLC that elects pass-through taxation while retaining corporate liability protection, subject to eligibility rules.

Limited Liability Partnership (LLP)

An alternative entity (common in countries without LLCs) that offers liability protection and some tax flexibility similar to an LLC.

Amended Return

A filing that corrects a prior-year tax return, often used to claim missed deductions or carry back current losses for refunds.

Carryback Loss

Using a current-year business loss to offset income from prior years in order to obtain an immediate tax refund.

Tax Planning

The proactive, year-round process of arranging transactions to minimize taxes within the law rather than waiting until year-end.

Business Deduction

An expense that meets three tests—business purpose, ordinary, and necessary—allowing it to offset business income.

Business Purpose Test

Requirement that the primary reason for an expense is related to generating or facilitating business income.

Ordinary Expense

A cost that is typical in amount and frequency for others in the same industry or role.

Necessary Expense

A cost that is helpful and appropriate for earning or increasing business income; not merely a personal or lavish expense.

Depreciation

The annual deduction for the wear, tear, or obsolescence of tangible income-producing property such as real estate or equipment.

Amortization

The deduction over time for the cost of intangible assets (e.g., software, customer lists); must often be elected on the return’s first year of use.

Cost Segregation

A study that reclassifies components of real property as personal property to accelerate depreciation and increase current deductions.

Capital Cost Allowance

Another term for depreciation used in some countries; provides the same gradual cost recovery for assets.

Bonus Depreciation

An accelerated deduction that allows a large portion (sometimes 100%) of qualified asset cost to be expensed in the first year.

Like-Kind Exchange (1031 Exchange)

A swap of real property for other real property, deferring tax on gain if strict rules and timelines are followed.

Tax Bracket

A segment of taxable income taxed at a specific marginal rate; understanding brackets helps measure benefit of deductions and credits.

Economic Substance Doctrine

The principle that a transaction must have a genuine non-tax business purpose and economic effect beyond its tax benefits.

Documentation

Detailed, contemporaneous records (receipts, logs, agreements) required to substantiate deductions and withstand tax-collector scrutiny.

Wealth Strategist

A professional who coordinates advisors and helps integrate tax, legal, and investment strategies for optimal wealth building.

Built-In Tax Savings Investment

An investment (e.g., certain oil & gas or specific real estate deals) that carries immediate tax deductions without extra structuring.

Tax Credit

A direct, dollar-for-dollar reduction of tax owed, unlike a deduction which merely lowers taxable income.

Refundable Credit

A credit paid to the taxpayer even if no tax is due, potentially producing a refund greater than taxes owed.

Non-Refundable Credit

A credit that can only offset tax liability; excess amounts are lost or carried forward if no tax is due.

Family Credit

Tax incentives tied to number and ages of children, designed to offset household expenses.

Education Credit

Credits that help cover tuition and related costs at universities or trade schools, often limited by years of study.

Working-Poor Credit (Earned Income Credit)

Refundable credits that supplement low and moderate earned income, sometimes available after deductions reduce taxable income.

Charity Credit

A credit offered by some jurisdictions to encourage donations to schools, the poor, or other qualified charities.

Investment Tax Credit

Large credits for businesses and investors engaged in targeted activities such as R&D, low-income housing, or equipment purchases.

Rule 1 – It’s Your Money, Not the Government’s

Guiding principle that proactive tax planning keeps legally allowable cash in your pocket rather than remitting it unnecessarily.

Rule 2 – Tax Laws Were Meant to Reduce Your Taxes

View that the code offers incentives and elections intended to lower citizens’ taxes when they act as lawmakers desire.

Rule 3 – A Quick Way to Put Money in Your Pocket Is to Reduce Your Taxes

Emphasizes that tax savings can immediately improve cash flow, often faster than increasing revenue.

Rule 4 – Everything You Do Either Increases or Lowers Your Taxes

Recognition that everyday choices, personal or business, have tax consequences to be managed intentionally.

Rule 5 – The Tax Law Is a Series of Incentives for Entrepreneurs and Investors

Asserts that credits and deductions are designed primarily to motivate productive economic activity.

Rule 7 – It’s Not How Much You Own, It’s How Much You Control

Stress on structuring ownership (e.g., via family LLCs) to shift income to lower brackets while retaining control.

Rule 9 – All Tax Planning Must Have a Business Purpose

Every strategy must make commercial sense; pure tax plays without profit motive are vulnerable to disallowance.

Rule 10 – Reduce the Base to Reduce the Tax

Advice that cutting the taxable amount (base) through deductions, shelters, or entity choice is the primary road to lower tax.