5 Need-To-Know Tax Terms That May Save You This Tax Season

Welcome to Selfmade Finance School, our new money series with Block Advisors to help small business owners with their tax, bookkeeping, and payroll needs year-round. This week, we tackle financial literacy and the money terms you should know.
Financial jargon can be intimidating and personally I think it is one of the main reasons people feel overwhelmed when talking about money and taxes. I have found that if you can break down the jargon, it is really not that scary. Today I will do my best to take some heavy words and turn them into your new lingo!
But don't worry, you don't need to memorize – or even fully understand – everything outlined here. If you're working with a tax professional who specializes in small business taxes, they'll handle it for you. And should be able to explain anything that doesn't make sense.
"Small business taxes and tax jargon can be complicated, but you don't have to go it alone," said Marcie Rahn, EA and Certified Master Instructor at Block Advisors. "Our small business certified tax pros are up to date on all federal, state and local tax laws and have an average of 12 years' experience. Let us sweat the details so you can focus on what you're best at. For most people, that's not taxes, bookkeeping and payroll. Luckily, that's exactly what Block Advisors is best at."
Adjusted Gross Income: This sounds fancy but it's a fairly straightforward concept. Your Adjusted Gross Income (AGI) is the starting point for calculating your taxes and determining your eligibility for certain tax credits and deductions that you can use to help you lower your overall tax bill. Some common examples of deductions that reduce AGI include traditional IRA contributions, health savings account contributions and educator expenses. In many types of businesses, your net business income, which is simply your total gross income minus specific deductions, like inventory, employee pay and benefits, mileage for business vehicles, business-related travel expenses, business utilities, ongoing education, and more, passes through to you as a business owner and is included in your AGI. (Note: This is not a comprehensive list).
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What Is Depreciation?
If you own a business, you can deduct purchases used to make income for your business over time. This includes business assets like equipment and property. To do this, you will need to determine the depreciation schedule for the asset. Depreciation means you're spreading and deducting the cost of the asset over several years. This gets rather nuanced and is based on the three/five/seven-year (or longer) property timeframe in which you can depreciate the assets. You may be able to immediately write-off (deduct) the cost of some kinds of assets in the year you purchase them. You can also depreciate real estate if used in a trade or business if it creates income for you. Understanding depreciation can get complex so I suggest using a tax professional for this.
What Are Capital Gains and Do I Need To Care?
A capital gain is the rise in value of a capital asset (for example a security or real estate) that gives it a higher worth than the purchase price. The price you pay for something is called your cost or cost basis. The difference in the price when you sold it versus the cost basis is considered your capital gain or capital loss. There are distinct tax consequences when dealing with capital gains and losses so it is always important to be aware of what your tax liability would look like before you sell an asset.
Photo by Katie Harp for Unsplash
What Does It Mean To Be Audited?
There are several types of audits. A mail audit is limited to a few items on an audit letter that you will receive from the IRS. It is usually something that got flagged and they need clarity on it. It may be fairly simple to clear up if you have the right documentation and get help responding.
Most important – never ignore a letter from the IRS!
An office or field audit is more work. You will need to gather the information/documents that the IRS is requesting and prepare to answer in-depth questions about your business's finances and activities. You will also need to prepare to explain, in detail, the business's accounting and recordkeeping system (so as a business owner, make sure YOU understand this). If you don't already have one at this point, it is HIGHLY recommended that you hire a licensed tax professional to represent you and advocate your tax return positions. If you don't have someone in mind, reach out to Block Advisors — they are experts.
What is a Schedule C and does it apply to me? The Schedule C is basically your profit and loss rundown (P&L) from your business if you are a sole proprietorship. It is used to report income and expenses to the IRS and shows how much money you made or lost in a business that you operated by yourself. The form reports how much of your income from your business is subject to tax or whether you have a loss for tax purposes. You file a Schedule C along with your Form 1040. In many cases, you may also have to file a Schedule SE (Self-Employment Tax). Your Block Advisors small business certified tax pro can help you with this.
This is a short list of jargon in the tax space. There is plenty more behind this. Like I said, I highly suggest hiring someone to help you through your taxes, especially if you are feeling overwhelmed.
Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regards to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. O'Keeffe Financial Partners and any other entity listed herein is not affiliated with Kestra IS or Kestra AS Investor Disclosures: https://bit.ly/KF-DisclosuresCheck out more Selfmade Finance School content below:
4 Tips For Navigating The Pandemic Like A Small Business Pro
Do I Really Need An Accountant For Tax Season?
Photos by Katie Harp and You X Ventures for Unsplash
Getting the word out about your brand takes time, drive, and ingenuity. And it doesn't come easy for many entrepreneurs. As part of our collaboration with Office Depot, we're chatting with Selfmade alum Taylor Morgan McPherson, founder of Sustainable Sparkle Bar, about ways in which she scored press as a solo startup brand and what she learned from Selfmade to take her brand marketing up a notch.
B + C: How did you know Sustainable Sparkle Bar was your business to start?
Glitter has always been my thing, so when I started my event company I decided to make it my niche. I started telling people I threw glitter-themed parties where people would get sparkled with glitter body art and makeup. Six months after that I applied to my first festival and to work with SUR restaurant in West Hollywood.
B + C: What's one strategy that's helped you start your business?
I honestly can't say that I've had a specific strategy that I've followed when it comes to getting my business off the ground. I have a PR background so I was just constantly pitching new business and posting on social media.
B + C: What's the biggest challenge you face as a small business owner?
I would say creating a stable income and revenue stream. With a seasonal, event-based business it can be very up and down.
B + C: What was your most valuable takeaway from Selfmade?
The relationships I made and the push to start an email database.
B + C: How do you stay motivated?
I love what I do and I believe in myself 100%. Staying motivated isn't the hard part. Pushing myself to do the work and staying accountable is the hard part.
B + C: What's your best organizational tip? Do you use any apps that help you manage your business?
I keep multiple to-do lists, hand-written and digital. I also tell clients and partners that I will have something to them by a certain time or day so I have to stick to it.
B + C: What's one piece of advice you would give to female entrepreneurs on the brink of starting?
Just do it, take the leap. And don't worry about what anyone else says to thinks.
B + C: Who inspires you in the entrepreneurial space?
Issa Rae, I'm so inspired by everything that she's created being a creative and a black woman. It's my dream to have my own show one day based on my life and where I give advice and talk about the world. She's doing it and making people laugh and giving people joy. And it's based in LA. Watching Insecure only further cemented my dreams of wanting to live in LA.
B + C: How did you hear about the Office Depot scholarship?
One of my friends that I met through Camp No Counselors saw an IG ad for it and nominated me.
B + C: What has receiving the scholarship to Selfmade done to help you start/grow your business?
It's completely helped me level up and take my business to another level. Selfmade helped me host my first virtual event and taught me how to set up my website to sell tickets to events and get RSVPs.
B + C: How have Office Depot services or products helped you accomplish more in your business?
I got new cards to send in all of my orders with my discount code on them. I also bought a really cool 4K camera that I now use for my social media.
Thanks Taylor! You really know how to sparkle. We love her colorful, creative vibe. You can follow Sustainable Sparkle Bar on Instagram @sustainablesparklebar.
Let Office Depot OfficeMax help you stand out in the crowd. From signs, posters & banners to promote your business, to marketing materials to keep your customers informed, Office Depot OfficeMax offers a full suite of business services & solutions to help you & your business get noticed.
Head to Office Depot's Selfmade page to check out even more amazing business resources (and discounts!) to help you accomplish more on your entrepreneurial journey. These offers are available for a limited time only, so be sure to take advantage of all this goodness while supplies last. Want to join the next Selfmade cohort this summer? Check out all of the scholarship details right here.