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Financial Terms Related to Tax

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  1. 1. Financial Terms related to Tax This document is part of the valuable contents available at, a free onlineglossary with more than five thousand financial and business terms. This document can be copied and distributed freely Find thousands of financial terms at respecting its original format. It is forbidden its transcription, translation or change on its format without authorization of its author or editor.TAXAd valorem tax • Is a tax placed on real property. This is a primary revenue source for many municipalities.After tax • Describes funds on which an employee has already paid all income taxes, for example, amounts held outside a 401(k) plan or traditional IRA, or within a Roth IRA. Taxes on benefits derived from these funds, plus investment earnings in a Roth IRA, are not payable when they are received. See basis. Also known as post-tax.After tax proceeds from sale of old asset • Found by subtracting applicable taxes from the proceeds from the sale of an old asset.After tax profit margin • The ratio of net income to net sales.
  2. 2. 2|PageAfter tax real rate of return • Money after-tax rate of return minus the inflation rate. • Money after-tax rate of return minus the inflation rate. Hence, this refers to the purchasing power increase.Alternative minimum tax • Abbreviated AMT. An alternative tax computation that adds certain tax preference items back into Adjusted Gross Income. If the AMT is higher than the regular tax Find thousands of financial terms at liability for the year, then the regular tax and the amount by which the AMT exceeds the regular tax are paid.Asymmetric taxes • A situation wherein participants in a transaction have different net tax rates.Average pre tax profit margin • Pre-tax Income divided by Sales. This measures how well management converts sales dollars into profits after deducting all the operating expenses for making and selling its products. Compare the last two years pre-tax profit margins with the 5- year average to show the trend of growth.Average tax rate • Taxes as a fraction of income; total taxes divided by total taxable income. • A firms taxes divided by its taxable income.Before tax • Describes funds on which the employee has not yet paid income taxes, for example, amounts held in a qualified plan or traditional IRA. Taxes have been deferred, not waived, and are normally due when funds are paid out from the qualified plan or IRA. Also known as pre-tax.Before tax profit margin
  3. 3. 3|Page • The ratio of net income before taxes to net sales.Break even tax rate • The tax rate at which a party to a prospective transaction is indifferent between entering into and not entering into the transaction.Cash flow after interest and taxes • Net income plus depreciation.Corporate tax view Find thousands of financial terms at • The argument that double (corporate and individual) taxation of equity returns makes debt a cheaper financing method.Corporate taxable equivalent • Rate of return required on a par bond to produce the same after-tax yield to maturity that the premium or discount bond quoted would. • Rate of return required on a par bond to produce the same after-tax yield to maturity that the premium or discount bond quoted would.Deferred income taxes • On the Balance Sheet, deferred taxes are a liability that result from income already earned and recognized for accounting purposes, but not for tax purposes.Deferred taxes • Are a temporary source of free cash flow. This liability is a non-cash expense until it is paid. • A non-cash expense that provides a source of free cash flow. Amount allocated during the period to cover tax liabilities that have not yet been paid.Depreciation tax shield • The value of the tax write-off on depreciation of plant and equipment.
  4. 4. 4|PageDouble tax agreement • Agreement between two countries that taxes paid abroad can be offset against domestic taxes levied on foreign dividends.Double taxation • Refers to corporate income which is subject to both corporate taxes and individual taxes. Frequently, it is viewed as the case whereby the companys income is taxed and the distribution of that income in the form of a dividend paid to the shareholder as taxed again. Find thousands of financial terms at • a) A situation where the same income is taxed in two separate countries; to reduce double taxation, many countries have negotiated tax treaties that override domestic law; b) Occurs when the already once-taxed earnings of a corporation are distributed as cash dividends to its shareholders, who are then taxed again on these dividends.Earnings before interest and taxes • Abbreviated EBIT. A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and non-operating profit before the deduction of interest and income taxes.Earnings before interest, taxes, depreciation, and amortization • Although it is not defined by GAAP, EBITDA can be used to analyze a companys profitability. Differs from a Cash Flow statement by excluding changes in working capital and payments for taxes and interest. Calculated by adding Net Income, income taxes, Interest, Depreciation, and Amortization.Equivalent taxable yield • The yield that must be offered on a taxable bond issue to give the same after-tax yield as a tax-exempt issue. • The yield on a taxable security that would leave the investor with the same aftertax return he would earn by holding a tax-exempt municipal; for example, for an investor
  5. 5. 5|Page taxed at a 50% marginal rate, equivalent taxable yield on a muni note issued at 3% would be 6%.Foreign tax credit • Home country credit against domestic income tax for foreign taxes paid on foreign derived earnings.Imputation tax system • Arrangement by which investors who receive a dividend also receive a tax credit Find thousands of financial terms at for corporate taxes that the firm has paid.Income before taxes • See Pre-tax Income.Interest equalization tax • Tax on foreign investment by residents of the U.S. which was abolished in 1974.Interest tax shield • The reduction in income taxes that results from the tax-deductibility of interest payments.Investment tax credit • Abbreviated ITC. An incentive for businesses in various regions of the country to purchase certain types of assets or undertake certain types of research and development activities; results in a direct reduction of federal taxes that would otherwise be payable. • Proportion of new capital investment that can be used to reduce a companys tax bill (abolished in 1986).Limited tax general obligation bond • A general obligation bond that is limited as to revenue sources.
  6. 6. 6|PageMarginal tax rate • The rate at which additional income is taxed. • The tax rate that would have to be paid on any additional dollars of taxable income earned. • The tax rate that would have to be paid on any additional dollars of taxable income earned.Mortgage tax Find thousands of financial terms at • Is a tax which is assessed against a new mortgage. It is usually paid by the borrower.Net income before taxes • See Pre-tax Income.Personal tax view of capital structure • The argument that the difference in personal tax rates between income from debt and income from equity eliminates the disadvantage from the double taxation (corporate and personal) of income from equity.Pre tax income • Also may be called Net Income Before Taxes, Income Before Profit, or Income Before Taxes. This is the profit made by the company before paying taxes. It is calculated by dividing the net income by one minus the tax rate: Net Income / (1 - tax rate as a decimal)Pre tax profit on sales • Also known as Profit Margin; Profitability. Calculated by dividing the Pre-tax Income by Net Sales: (Net Income / (1 - Tax Rate)) /Revenues. This measures the effectiveness of management in controlling expenses and is a useful measure of overall operational efficiency when compared with prior periods or
  7. 7. 7|Page other companies in the same business. This return on sales varies widely between industries (e.g. 2% return for supermarkets is reasonable, but manufacturing industries should return 4-5%). A declining profit margin can be caused by declining sales, declining efficiency, aging plant and equipment, or inappropriate management decisions. If quarterly pre-tax income is not available, you can estimate the tax rate from the yearly tax rate.Progressive tax system • A tax system wherein the average tax rate increases for some increases in income Find thousands of financial terms at but never decreases with an increase in income.Regressive tax • A tax that takes a larger percentage of the income of low-income people than of high-income people; examples include gasoline tax and cigarette tax. See also: Progressive Tax.Short term tax exempts • Short-term securities issued by states, municipalities, local housing agencies, and urban renewal agencies.Split rate tax system • A tax system that taxes retained earnings at a higher rate than earnings that are distributed as dividends.Tabs tax anticipation bills • Special bills that the Treasury occasionally issues. They mature on corporate quarterly income tax dates and can be used at face value by corporations to pay their tax liabilities.Tans tax anticipation notes • Tax anticipation notes issued by states or municipalities to finance current
  8. 8. 8|Page operations in anticipation of future tax receipts.Tax anticipation bills • Abbreviated TABs. Special bills that the Treasury occasionally issues that mature on corporate quarterly income tax dates and can be used at face value by corporations to pay their tax liabilities.Tax anticipation note • Is a security issued by a municipality against expected tax collections. It has a Find thousands of financial terms at maximum maturity of one year. It is used for cash management purposes.Tax basis • See Basis.Tax books • Set of books kept by a firms management for the IRS that follows IRS rules. The stockholders books follow Financial Accounting Standards Board rules.Tax breaks • One form of government incentive used to encourage corporate capital expenditures involving the tax savings associated with being able to claim non-cash expenses like amortization (CCA). The CCA rate can be increased by Order-in- Council in order to increase the tax shield benefits available to companies.Tax clawback agreement • An agreement to contribute as equity to a project the value of all previously realized project-related tax benefits not already clawed back to the extent required to cover any cash deficiency of the project.Tax deferral • The postponement of taxes on the earnings or growth related to certain favored investments until the earnings are withdrawn.
  9. 9. 9|PageTax deferral option • The feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is payable only when the gain is realized by selling the asset.Tax deferred • Refers to a situation or an investment whereby the tax liability is delayed until a later date. Retirement plans such as 401K and IRAs are examples of this feature.Tax deferred retirement plans Find thousands of financial terms at • Employer-sponsored and other plans that allow contributions and earnings to be made and accumulate tax-free until they are paid out as benefits.Tax differential view of dividend policy • The view that shareholders prefer capital gains over dividends, and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.Tax efficient portfolios • Are investment holdings which have both trading profits and tax minimization impact as goals. These portfolios recognize that the subsequent payment of taxes reduces the investors after tax returns. When holdings are held by pension plans or tax deferred accounts, there is no immediate tax liability on realized gains. However, an investor holding mutual funds which have high rates of security turnover and significant realized gains are subject to immediate tax year liabilities.Tax exempt • Refers to income or property which is not subject to tax. Interest on Municipal bond is not subject to federal income tax. Similarly, interest on a treasury bond is not subject to state or local income taxes.Tax exempt sector
  10. 10. 10 | P a g e • The municipal bond market where state and local governments raise funds. Bonds issued in this sector are exempt from federal income taxes.Tax free acquisition • A merger or consolidation in which 1) the acquirers tax basis in each asset whose ownership is transferred in the transaction is generally the same as the acquirees, and 2) each seller who receives only stock does not have to pay any tax on the gain he realizes until the shares are sold.Tax haven Find thousands of financial terms at • A nation with a moderate level of taxation and/or liberal tax incentives for undertaking specific activities such as exporting or investing.Tax reform act of 1986 • A 1986 law involving a major overhaul of the U.S. tax code.Tax shield • The reduction in income taxes that result from taking an allowable deduction from taxable income.Tax swap • Swapping two similar bonds to receive a tax benefit.Tax timing option • The option to sell an asset and claim a loss for tax purposes or not to sell the asset and defer the capital gains tax.Taxable acquisition • A merger or consolidation that is not a tax-fee acquisition. The selling shareholders are treated as having sold their shares.Taxable capital gain
  11. 11. 11 | P a g e • The percentage of net capital gains (the difference between capital gains and capital losses) that are included as taxable income, currently 50 percent.Taxable gain • The portion of a sale of a security or distribution of Mutual Fund shares that is subject to taxation.Taxable income • Gross income less a set of deductions. Find thousands of financial terms at www.ftpall.comTaxable transaction • Any transaction that is not tax-free to the parties involved, such as a taxable acquisition.Two tier tax system • A method of taxation in which the income going to shareholders is taxed twice.Value added tax • Method of indirect taxation whereby a tax is levied at each stage of production on the value added at that specific stage.Withholding tax • A tax levied by a country of source on income paid, usually on dividends remitted to the home country of the firm operating in a foreign country. Tax levied on dividends paid abroad.