Tax Glossary :

For your benefit we've included a brief definition of selected business, tax, financial and real estate terms. Keep in mind that the definitions are abbreviated and, as with all terms, accepted usage can vary by industry, area of the country, etc.

Accelerated Depreciation. A method of calculating depreciation where deductions are higher in the early years of the asset's life. Contrasted with straight-line depreciation where deductions are equal for each year of the life of the asset.

Acceleration Clause. A clause (often in mortgages or other loans) where some action will occur ahead of schedule as a result of some other action. For example, an acceleration clause in a loan may mean that the full amount is due immediately if the debtor misses two monthly payments in a row.

Accidential means death benefit. An option in an insurance policy where the payment is a multiple (frequently double) the policy face amount in the case of death by accidential means. Death must usually result from the accidential means within a certain time period (usually 90 days).

Accountant's Opinion. If a independent certified public accountant is requested to audit a company's books, he will issue a opinion as to the condition of the financial statements. There are several degrees of opinion from clean to adverse. A clean opinion doesn't mean that every number is correct, only that the financials fairly represent the position of the company. An adverse opinion means the financials don't represent the position of the company. A disclaimer means the auditor can't (for any number of reasons) express an opinion on the statements.

Accounting Controls. Methods and procedures intended to safeguard assets, authorize transactions, and ensure the accuracy of financial records.

Accounting Equation. Simply stated, assets are equal to liabilities plus owners' equity.

Accounting Method. Any number of approaches for calculating the income of an entity. Usually applied to the general means of recognizing income and expenses, e.g., cash or accrual. But it can also apply to method of keeping inventories, etc.

Accounting Procedure. Similar to accounting method, but applied to more routine issues. For example, the method of computing depreciation, handling small capital expenditures.

Accounting Rate of Return. A method of computing the profitability where the total cash inflow over the life of the project is reduced by expenses. This amount is divided by the estimated life of the project to arrive at an annual return. That's divided by the investment's cost. The result is an average rate of return. See Discounted Cash Flow.

Accounts Payable. A liability arising when a vendor provides goods or services that are not immediately paid for and where the liability is not formalized in writing but backed by the reputation and credit worthiness of the debtor. When a business using the accrual basis of accounting purchases goods or services the company reports an expense and an account payable. When payment is made the account payable is reduced.

Accounts Receivable. For accrual basis businesses, transactions not paid in cash create an account receivable, an unsecured promise to pay in the future. The accounting entry is a debit to accounts receivable and a credit to sales. On payment, the account receivable is credited and cash is debited.

Accounts Receivable Financing. Financing where the company's accounts receivable are used as collateral. This type of financing is usually short-term in nature.

Accounts Receivable Turnover. Ratio obtained by dividing total credit sales by accounts receivable. The result indicates how many times the receivables have been collected during the period covered by the sales. It's a measure of how well the company is collecting it's accounts receivable.

Accrual Accounting. Under this method of accounting, income is recognized when earned, whether or not collected, and expenses are recognized when events have occurred that determine that a liability exists and the amount of the liability can be ascertained with reasonable accuracy. For example, at December 31 you ship a customer 100 widgets. You have to record the income in that year, even though you won't get paid until the following year. If you were buying the widgets, you could accrue the expense in the tax year you ordered them. There are some special rules for tax purposes and there can be a significant divergence between recognition of income and expenses for tax and financial accounting purposes.

Accrue. To record an item in the accounting books when using the accrual method of accounting. For example, you accrue income when the customer signs a contract, even though you won't receive any cash at that time. When you accrue an item of income or expense can depend on a number of factors including the entity's procedures. IRS requirements here frequently diverge from accounting rules.

Accrued Expense. An expense that has been incurred, but not yet paid in cash. Similar to accounts payable, but usually associated with nontrade vendors. For example, an electric bill.

Accrued Future Service Benefit. The portion of a participant's pension retirement benefit that relates to the participant's period of service credited after the effective date of the plan but before a specified current date.

Accrued Revenue. Income that has been earned (by the sale of goods or performance of services) but where payment has not been received in cash. Similar to accounts receivable.

Accumulated Depreciation. The total depreciation taken on an asset since it was acquired.

Accumulated Dividends. With respect to life insurance, dividends not distributed by the insurance company but left to accumulate with interest.

Accumulated Interest. Interest not paid currently that is added to the balance owing.

Acid-Test Ratio. Also called the quick ratio, it's equal to the sum of cash, short-term investments and net current receivables divided by current liabilities. It's a measure of whether or not the business could pay all its current liabilities if they came due immediately.

Active Participation. Involvement in a rental real estate activity making management decisions. Requires no specific number of hours.

Activity. For the passive activity rules, it's the integral economic unit for measuring a taxpayer's level of participation in a trade or business. One location can have more than one business activity. For example, you might have an S corporation that sells computers at retail and does typesetting working out of the same location. The two may be separate activities. On the other hand, two or more related businesses can also be combined into one activity.

Additional Paid-In Capital . Equity contributions to a corporation in excess of the amount of capital stock. See Owner's Equity , below.

Add-On Interest . Interest that isn't paid by the debtor, but added to the principal amount.

Adjusted Basis. Used for determining depreciation and gain or loss on the disposition of an asset. Your adjusted basis in an asset is your beginning basis (see Basis, below), decreased by depreciation, depletion or any Sec. 179 expense taken or increased by capital additions. For example, you purchase a machine for $10,000 (your basis) and take a Sec. 179 expense deduction of $1,000 and depreciation of $2,000 in the first year. At the end of the year your adjusted basis is $7,000. Note. Even professionals often say basis when they really mean adjusted basis.

Adjusted Gross Income. Also known as AGI, it's your individual income before personal exemptions or standard or itemized deductions. It's the total of wages, interest, dividends, capital gains (or up to $3,000 in losses), profit or loss from real estate or pass-through entities (e.g., S corporation), pension income and certain other items less contributions to an IRA or Keogh plan, one-half of any self- employment income, and health insurance for self-employed individuals, and certain other deductions.

Adjusted Trial Balance. A list of all the ledger accounts with their adjustments and the adjusted balances.

Adjusting Entry. An entry made at the end of the period to assign expenses to the period for which they were incurred and revenue to the period in which it was earned. They are also used to correct entries that could not be accurately made before the end of the year.

Administrative Dissolution. The dissolution of a corporation by the Secretary of State or similar state authority as a result of the corporation's failure to file corporate tax returns, file an annual report, maintain a registered agent, etc.

Administrative Expense. Sometimes part of general expense, it's an expense that isn't directly associated with selling, manufacturing, distributing, etc. but part of overall management such as accounting, general management, etc.

Administrative Services Only. Where one party provides only administrative or clerical services to an employee benefit plan. (Typically the employer is the administrator.) Another party acts as the trustee.

Advances. Funds made available to another party. In the case of a loan, it's the disbursement of funds under a note. In tax parlance it often means something between a formalized loan and equity. For example, a shareholder puts money into a corporation with the intention of being paid back shortly.

Adverse Opinion. Instead of an unqualified opinion, it's an opinion by a CPA that the financial statements do not represent fairly the results of the operations of the company and/or are not in conformity with generally accepted accounting principles (GAAP).

After-Acquired Clause. A clause in a mortgage or similar loan document that provides that any mortgageable property acquired after the mortgage is signed will be considered additional security for the loan.

Agent. A person or entity authorized to act on behalf of another party. While a person can act on his own, a corporation can only act through its agents.

Aggregation. The combination of several business operations into a larger unit. Primarily used to combine passive trade or business undertakings into one or more activities in order to determine whether a taxpayer is a material participant.

Aging of Accounts Receivable. A way to estimate bad debts by analyzing individual accounts receivable according to the length of time they have been outstanding. For example, outstanding accounts may be split into those 30 days or less outstanding, 60 days or less outstanding, etc. The analysis includes arriving at the balance for all the accounts in a group.

All-or-None Bid. A bid for a number of different items in which the bidder will not accept a partial award, but only an award for all the items, services, etc. included in the bid.

All-Risk. An insurance policy covering real or personal property against any loss except those specifically excluded.

Allocation Base. An approach for assigning a given cost to two or more departments of a business.

Allowance for Doubtful Accounts. An offset, or contra account, to accounts receivable to reflect the estimated collection losses on outstanding accounts receivable. The allowance reduces revenue. Such an allowance is generally not allowed for tax purposes. Also known as an allowance for bad debts and allowance for uncollectible accounts.

Allowance Method. A method of recording collection losses based on estimates before the actual determination that the business will be unable to collect such losses. For example, at the end of the year a company will make an estimate of the uncollectible accounts receivable at that point in time. The actual dollar amount of the accounts receivable that will be uncollected may not be known for certainty for many months or even years.

Amortization. This is similar to straight-line depreciation, allowing a business or individual to write off an expenditure over a number of years. Amortization generally applies to intangible assets. For example, you purchase a business consisting of a machine with a fair market value of $10,000 and goodwill of $15,000. You can't expense (write off) the cost in the year acquired, but you can depreciate the machine using any of several methods, including one that provides greater deductions in the early years. The goodwill can only be amortized over 15 years using a straight-line method, or $1,000 per year.

Annual Meeting. A meeting of the shareholders held each year to elect directors of the corporation, present the annual report, and conduct other business including items which requires shareholder approval.

Annual Percentage Rate (APR). The effective interest rate required to be disclosed under the Truth in Lending Act.

Annuity. The dictionary definition is a contract issued by an insurance company that pays an annuitant an amount periodically for a certain time for the remainder of his life. Common usage has expanded that definition to the point where you must dig deeper to understand the meaning. Variations include a deferred annuity where you make payments into a fund over a period of years (where tax on the fund's income is deferred), an immediate annuity (the original definition) or many other plans where a series of payments, either into or out of the fund, are involved.

Appropriation of Retained Earnings. Restriction of retained earnings that is recorded by a formal journal entry. The restriction may be made voluntarily by the board of directors to show the earnings are being accumulated for a particular purpose or the restriction may be the result of a covenant in a loan agreement.

Articles of Incorporation. Document to be filed in most states with the secretary of state or similar authority of a state by the founders of the corporation specifying such items as the name, location, nature of the business, capital investment, etc. The document is also known as a Certificate of Incorporation. The corporation only comes into existence when the filing is approved by the state.

Articles of Organization. Similar to Articles of Incorporation, but the document filed with the secretary of state or similar authority of a state by the founders of an limited liability company (LLC). It is also known as Articles of Formation.

Assessments. The right to secure additional payments from partners or co-venturers in a project.

Assignment. A transfer of your rights to another party. For example, in the case of an insurance policy it's the partial or total transfer of the policyowner's rights to another party. If you're selling a piece of equipment, you may be able to assign the warranty to the buyer. Some contracts expressly prohibit assignment.

Assumption. An agreement where the purchaser agrees to make the payments on an existing mortgage on the property. The original borrower remains liable unless he is specifically released.

Authorized Shares. The maximum number of shares of stock a corporation may issue according to its articles of incorporation. If additional shares are to be issued either to be sold or because of a stock split or dividend, the corporation must file an amendment with the state.

Average Cost Method. Inventory costing method based on the average cost of inventory during the period. Average cost is determined by dividing the cost of goods in inventory by the number of units of the same type in inventory at any point in time.

Bad Debt Expense. Generally, the cost of uncollectible accounts receivable which occurs when customers to whom a business has extended credit fail to pay. It can also refer to any debt owed you which is uncollectible.

Balance Sheet. Listing of the assets, liabilities and owner's equity at a spcific point in time.

Balloon Payment. The final installment on a loan which is greater than the prior payments and pays any remaining amount outstanding under the loan. For example, a loan calls for equal monthly payments of $500, where most of the payment is for interest. At the end of the loan a balloon payment of $100,000 is due.

Banker's Acceptance. A time draft (note) drawn on and accepted by a bank. This instrument is usually used for financing import-export transactions and generally financing international trade. Payment of the note is guaranteed by the bank.

Base. Also known as a Stop . In real estate leases tenants are often responsible for operating expenses of the building over a certain dollar amount, the base or stop. The base may be expressed in dollars per square foot, total dollars, or as a base year (in which case the base is the expense in the base year).

Example-- Expenses for a building are $9 per square foot in 1997. Madison Inc. has a base of $6. For 1997 Madison must pay $3 per square foot in Escalation . (Note, the computations can be much more involved.) For a net lease the base is zero.

Basis. Used in determining depreciation or gain or loss on the sale of property. In the simplest situation, your basis in property you purchase is the cost. For example, you pay $1,000 for a machine--that's your basis. How you acquire the property determines your basis. For example, if you inherited the machine, your basis would be the fair market value at the decedent's death. In a simple tradein, your basis is equal to your adjusted basis (see above) in the equipment traded in plus any cash paid. If you contributed the property to a corporation, the corporation's basis would be the basis of the property in your hands. Your basis in the stock in an S corporation is your cost plus profits taxed to you less losses passed through and distributions. There are a number of other ways of arriving at basis. Please see Adjusted Basis , above.

Basis Point. A way of quoting the yield on a bond, note, or other debt instrument. One basis point is equal to 0.01%. Thus, a 50 basis point yield increase in a bond would be equal to 0.5%.

Batch Processing. Entering transactions in a group rather than as they occur.

Bearer Bond. While new issues are rare because of a change in the tax law, the principal and interest on the bond is payable to whoever has possession. On the other hand, the ownership of a bond in registered form is recorded with a bank, the issuer, etc.

Bearer Instrument. A note, instrument, or draft, payable to someone other than a designated payee, i.e., the bearer or to cash. Beneficiary . A person entitled to the benefits of a trust, will, insurance policy, pension plan, etc. For example, if you name your daughter as the sole beneficiary of a life insurance policy, only she is entitle to the proceeds.

Bid Bond. An agreement in which a third party agrees to be liable in the event the bidder fails to sign the contract as bid (if his bid is accepted). A bid deposit is similar, but the bidder must deposit cash or a certified check.

Blanket Mortgage. A single mortgage that covers more than one property.

Blanket Order. A purchasing arrangement where the purchaser contracts with a vendor to provide his requirements for an item or service on an as-required basis.

Blanket Position Bond. A fidelity bond where each employee is covered up to the bond penalty. The maximum liability is equal to the bond penalty times the number of employees.

Blind Pool. A partnership or syndication where the investments to be purchased are not specified at the time the investments are sold.

Blue Sky Laws. State laws that govern the issuance and sale of securities (stocks, bonds, etc.) to residents of the state and require the registration of the securities with the state prior to sale. The rules are designed to protect investors from fraud. While a new stock issue may be exempt from federal regulation, it may not be exempt from state rules.

Bond Discount. The excess of the value of a bond at maturity (the par value) over the issue price of a bond or the purchase price. The difference between the value at maturity and the issue price is often called original issue discount. For example, the par value of a bond is $1,000; the bond is issued at $990. The bond has $10 of original issue discount. Another bond has a par value of $1,000; you purchase it in the open market at $900. The bond has $100 of discount.

Bond Premium. The excess of the bond's price over the maturity (par) value. For example, you purchase a bond for $1050; the maturity value is $1,000. The bond has a premium of $50.

Bond Sinking Fund. Amounts accumulated and segregated for the purpose of redeeming or retiring bonds. Can also apply to preferred stock.

Book Value of an Asset. The asset's cost less accumulated depreciation.

Book Value of Stock. The book value of the assets of a company less the liabilities. Can be translated into book value per share by dividing by the number of shares outstanding.

Boot. A tax term that means cash or unlike property received in an exchange. For example, you trade investment real estate worth $500,000 for another property worth only $300,000. In addition to the deed on the new property you receive $200,000 in cash (or notes). The $200,000 is boot.

Break-Even Point. The dollar amount or unit amount of sales where total revenue equals total expenses.

Breakpoint. See Overage Rent.

Bridge Loan. See Interim Financing.

Broad Form Storekeepers Policy. An insurance policy for a retail store with four or fewer employees that provides both fidelity and crime coverage.

Builder's Bonds. Mortgage-backed securities issued by builders on mortgages accumulated from the sales of houses.

Bullet Loan. Generally, a loan where no principal repayments are made during the loan. Only interest is paid, leaving the total amount borrowed as a balloon payment at maturity.

Business Interruption Insurance. A policy that pays a stipulated amount when the business cannot operate because of some insured peril. For example, a policy will pay a certain percentage of the business's earnings lost because of a fire.

Businessowner's Program. An insurance policy designed for small offices or stores, covering the building and contents for full replacement cost as well as liability insurance.

Buy-Down. A loan in which someone other than the borrower puts up money to reduce the interest rate or borrower's monthly payments. Frequently done by builders in poor markets. It makes the house more affordable. The buy-down usually expires within a few years.

Bylaws. The rules governing the operation of an organization. In the case of a corporation, the bylaws are drawn up at the time, or shortly after incorporation. (Most stationery stores have standard forms which can be modified.)

Byproduct. Output of a production process with relatively little sales value when compared to the main product.

Callable Bond. A bond that can be redeemed by the issuer before the stated maturity date. Usually, the bond cannot be redeemed before a certain time, say 5 years. And often bonds are only callable at certain times. If a call date is missed, the bond may not be callable until the next call date. The call priviledge is to enable the issuer to refund the bonds at a lower interest rate should that occur during the term. The yield and value of a bond can be affected by any call priviledge. Sometimes known as a call feature.

Call Option. 1. The right to buy 100 shares of a stock (or stock index, etc.) at set price. Usually, the option holder has the right, but not the obligation to purchase the property. The option expires at a set time. For example, the current price of Madison Inc. is $50. For $5 per share you can purchase a option that allows you to buy Madison stock at $52 at anytime within the next 60 days. Traded options expire at preset times. 2. The right to prepay a mortgage.

Call Premium. In the case of straight or convertible bonds or preferred stock it's the amount in excess of the par value of the security the issuer may have to pay for the priviledge of redeeming the security before maturity. For example, if the par value is $1,000, the issuer may have to pay $1,100 to redeem the bond. The call premium can vary with the timing of the call feature. For example, the call premium may be $100 on a bond that's callable 5 years from issuance. The premium may be only $50 if the bond is callable 10 years after issuance. The term call premium can also refer to the purchase price of a call option.

Call Protection. The length of time during which a bond, preferred stock, etc. cannot be redeemed by the issuer.

Capital. Sometimes used as a synonym for the owner's equity in a business.

Capital Budgeting. A formal plan for making investments in plant, equipment, other fixed assets, advertising projects, etc. Items included in the capital budget have lives in excess of one year and often require long-range planning.

Capital Expenditure. The purchase of or outlay for an asset with a life of more than a year, or one that increases the capacity or efficiency of an asset or extends it's useful life. Generally, such expenditures cannot be deducted currently for tax purposes (or expensed for financial accounting purposes. Instead, they must be depreciated or amortized over their useful life.

Capital Gain (or loss). A category of gain or loss under the tax law resulting from the sale or other disposition of specified property such as stock or bond investments, real estate, etc. It does not include property used in a trade or business. However, special rules apply in such situations that can result in similar treatment for business property.

Capitalization Rate . The rate of interest used to discount the future income from a property to arrive at a present value.

Cash-On-Cash Return. Usually reserved for real estate income properties, it's the annual cash flow from the property divided by your cash investment. Sometimes called return on equity or equity dividend rate. It's a quick and dirty way to evaluate an investment.

Certificate of Compliance . A vendor's certification that the supplies or services delivered meet certain specified requirements.

Claims-Made Basis. Under this type of insurance policy the insurer is responsible only for claims filed during the period the policy is in force. See Claims-Occurrence Basis below.

Claims-Occurrence Basis. With this type of insurance policy the insurer is responsible for claims from events that occurred during the time the policy was in force. It makes no difference when the claim is filed.

Example-- A customer slips on a wet floor in your store in March 1997. You're covered by Madison Insurance. The customer doesn't file a claim until a year later when you're covered under a new company, Chatham. Under a claims-occurrence basis policy you'd report the claim to Madison, the insurer at the time the accident occurred. Under a claims-made basis you'd report the claim to Chatham, the insurer at the time the claim is filed.

Closely Held Corporation. A corporation with five or fewer shareholders who own more than 50% in value of the stock at any one time during the year. Note, this is the IRS definition. In common usage the definition can be broader.

Collateralization. To pledge mortgages, bonds, accounts receivable or other marketable properties as security for a loan.

Coinsurance Amount Limit . A requirement under burglary insurance that a minimum amount of insurance be maintained, based on the type and amount of merchandise.

Coinsurance Clause. In the case of a partial loss where the property is not insured for the indicated percentage of its cash value at the time of the loss, the recovery from the company is based on a percentage.

Example-- Your insurance policy contains a coinsurance clause of 80%. Your building sustained $100,000 in damages. The actual cash value of the property at the time of the loss was $500,000, but you only carried $300,000 of insurance. Based on the coinsurance clause, you should have had coverage of $400,000 (80% of $500,000). You can't recover the full $100,000 in damages. Instead, your recovery is limited by the percentage of your coverage ($300,000/$400,000) times the loss, or $75,000. If you had coverage of $400,000, your insurance would have reimbursed you for the full $100,000 loss.

Commercial Blanket Bond. A bond that covers employee theft by one or more employees up to a fixed amount.

Commercial Paper. Short-term (generally 2 to 270 days) obligations (notes) issued by banks and corporations with high credit ratings. These notes are usually unsecured and usually issued at a discount. Commercial Property Form. An all-risk type insurance policy covering business personal property against physical loss for retailers, wholesalers and certain other types of businesses.

Common Control. In tax parlance, the situation where a group of five or fewer persons own more than 50% of an undertaking and therefore have the ability (whether or not it is exercised) to direct operations.

Comparable Properties . One of the ways of appraising real estate (or other property) is to find recent selling prices of properties that are comparable to the one being appraised. If the properties are not identical, an appraiser can make adjustments.

Completion Bond. A guarantee provided by a bonding company to a lender or other party that the contractor will turn over the property to the owner free of any claims.

Concealment. Intentionally withholding adverse facts that are known when you're obligated to reveal them.

Concessions. In real estate, free rent, allowances for alterations, etc., or similar payments or allowances from a landlord to induce a tenant to sign a lease.

Conditional. In insurance parlance, a contract requiring the insured to meet specified conditions to obtain payment for any losses.

Consequential Losses. Indirect losses from an event.

Construction Loan. A loan intended only to finance the construction of a property. Usually must be converted to a term loan after construction is complete.

Constructive Total Loss. A partial loss where the cost of repairing the damage is greater than the value of the property after restoration.

Contingent Business Interruption Insurance. An insurance policy that provides benefits if your earnings are reduced because of damages to another business on which yours is dependent.

Contingent Financing Clause. A clause in a purchase and sale agreement the specifies that the buyer must be able to secure financing on reasonable terms or he can back out of the purchase.

Contingent Payments. Payments where the amount and/or timing is dependent on other events, usually the income from the property.

Example-- Fred buys all the stock of Madison Inc. for $250,000 plus 5% of Madison's sales in excess of $1,000,000 for two years from the date of the sale.

Contingent Interest. Income from a note that is at least partially based on the income from the property. This is common in financing commercial real estate. For example, Fred loans Madison $1 million at 8%. The terms also require the payment of 3% of the cash flow from the property in any year that the cash flow exceeds $750,000.

Contra Account. An asset account that normally has a credit balance. The contra account is used to offset a related account. The approach is used so that the regular asset account is shown at the original or undiminished value. For example, accounts receivable has a contra account usually called allowance for doubtful accounts . Fixed assets have a contra account called accumulated depreciation.

Contract Interest Rate. The stated, or nominal, interest rate in a contract.

Contributory Negligence. A defense argument that the plaintiff did not exercise sufficient care and that this contributed to his injury.

Convenience of Termination Clause. A contract clause that permits the party to terminate, at its own discretion.

Conventional Loan. A mortgage loan that is not backed by insurance from a government agency or other source.

Convertible Term. Term life insurance which is convertible into whole life without showing insurability.

Conversion Costs. The costs required to convert raw materials into finished product; including direct labor and overhead.

Cost Method. An appraisal method that values a property based on the cost to reproduce it today. That amount is usually adjusted for depreciation.

Example-- Madison owns a 15-year old factory building. The cost to reproduce the building today would be $900,000. The appraiser adjusts that figure downward for wear and tear and, possibly, the cost to upgrade electric service, etc.

Covenants. Promises included in an agreement to perform or not to perform certain acts. For example, a loan may contain a covenant that the borrower's debt-to-equity ratio cannot exceed 2 to 1.

Credit Enhancements. Using third-party guarantees such as a cosigner, the pledging of assets, an insurance company bond, or a letter of credit to provide additional security for a loan.

Cross-Purchase Plan. A plan by which each stockholder or partner in a closely held business agrees to purchase the interest of a departing stockholder or partner. Usually funded by life insurance on the lives of the other stockholders or partners. (Note, cross-purchase agreements can become unwieldy when more than four owners are involved.)

Current Yield. The yield of a bond or similar instrument, taking into account only the current interest and the price paid. Computed by dividing the annual interest by the purchase price.

Example-- You purchase a bond for $900 (with a face amount of $1,000) that pays $40 twice a year. The current yield is 8.89% ($80 divided by $900).

The current yield is not a true indication of the return on your investment if the purchase price is not the same as the face amount. In the example above, your total return would be greater because at maturity you'll receive $100 more in principal than you paid for the bond. The return will be affected not only by the face amount to be paid at maturity, but also by the time to maturity.

Debt Instrument. A generic term representing any written promise to repay the debt.

Debt Service. The cash required to pay the interest and principal due (usually during one year) on outstanding debt.

Debt-To-Equity Ratio. Total liabilities divided by total shareholders' equity. This is a measure of the cushion available to creditors should the firm be forced to liquidate. The ratio is sometimes calculated by dividing total long-term debt by shareholders' equity.

Debt Service Coverage. The borrower's annual net operating income before debt service and taxes divided by the annual debt service. A measure of how safe the loan is to the lender.

Deed In Lieu Of Foreclosure. The delivery of an asset's title to the lender when the loan is in default. The approach may benefit both parties by avoiding the expenses associated with foreclosure and the stigma of foreclosure. CAUTION. For tax purposes, the transaction is the same as a sale.

Deep Discount Bond. A bond where the market price is less than 20% or so of its face value. Like a zero coupon bond, the market price of a deep discount bond will rise faster when interest rates fall and drop faster when interest rates rise than a bond that is selling close to its face value.

Deep In, Deep Out Of The Money. A call option whose exercise price is well below the market price of the underlying stock (deep in the money) or well above the market price (deep out of the money). Thus, the premium associated with buying a deep-in-the-money call option is high.

Default. The failure of a debtor to comply with a provision of a bond indenture or loan agreement (commonly known as a technical default) or to make timely payment of interest or principal when due.

Defeasance. In corporate finance it is generally the discharge of old, low-rate debt without repayment prior to maturity. The corporation replaces it with newly issued securities with a lower face value buy paying higher interest or having a higher market value. The technique can result in tax and balance sheet advantages.

Deferred Charge. An expenditure carried as an asset until the amount represents a true expense for the period. For example, if a one-year insurance premium is paid three months before the end of the fiscal year, three months of the premium would be an expense in the year paid, nine months would be an expense of the following year. Thus, 9/12 of the premium would be a deferred charge. In this case it would be represented by an account called prepaid insurance. Deferred income is the opposite situation. For example, six months rent received in advance. Any amount not properly credited to the current period would be represent a liability.

Deferred Interest Bond. A bond where interest payments are not made currently, but at a later date. Similar to a zero coupon bond which pays 'interest' and principal at maturity. The interest, in effect, is compounded and paid at maturity. Market prices for such bonds are much more volatile than bonds which pay interest currently.

Demand Deposit. The technical name for a checking account or any other type of account where the funds can be withdrawn without prior notice.

Demand Loan. A loan with no set maturity date. The loan is payable whenever the lender chooses to call it.

Depreciation. A method of recovering your purchase price or other basis in an asset over its life rather than deducting the full amount immediately. An expense for book purposes or a deduction for tax purposes. Depreciation is often different for book and tax purposes. See Accelerated Depreciation above.

Depreciation Recapture. When tangible personal property is sold, the tax gain is based on the difference between the asset's adjusted basis and the selling price. Any gain up to the amount of depreciation taken is deemed depreciation recapture and taxed as ordinary income.

Example-- Madison bought a machine for $10,000. Five years later its adjusted basis is $4,000. Madison sells the asset for $9,000. The gain is $5,000, all of which is depreciation recapture. If Madison sold the asset for $11,000, it would have $6,000 in depreciation recapture (ordinary income) and $1,000 of capital gain.

CAUTION. The rules for real property are more complicated.

Direct Costs. Costs directly related to conversion of raw materials into product. Includes raw materials, direct labor and variable overhead.

Direct Costing. Also know as variable costing, a method of calculating costs that involves only raw materials, direct labor and variable overhead.

Direct Overhead. Costs directly associated with the manufacture of goods. That could include factory lighting, rent, insurance. Indirect overhead could include office expenses, R&D, lighting, etc.

Direct Placement. Also known as a private placement, the sale of securities directly to one or more professional investors or institutions, frequently insurance companies. The sale of securities in this fashion avoids many of the fees typically associated with public offerings.

Disappearing Deductible. An insurance policy where losses below a certain amount are excluded. Those above a certain amount are paid in full and those in between are paid a multiple of the loss.

Discount. This term can have a number of meanings, depending on the context. When used in connection with a loan, it's where the bank deducts its interest payment before giving the loan proceeds to the borrower. For example, where $100 is borrowed at 10% for one year, the borrower receives only $90. For bonds, it's the difference between the current market price and the face amount of the bond.

Discounted Cash Flow. The application of a factor, based on the cost of the firm's capital or prevailing interest rates (with a possible adjustment for risk), to the cash inflows and outflows from a project or investment. Also called net present value analysis.

Discount Rate . 1. The rate used to compute discounted cash flows or the present value of an investment. 2. The interest rate that the Federal Reserve charges member banks for loans.

Discount Yield. The yield on a security sold at a discount. U.S. treasury bills are sold at a discount. The face amount is returned to the investor at maturity. The annual yield is computed by dividing the discount by the face amount, then multiplying by the number of days in the year (360) and dividing by the number of days to maturity. For example, a note purchased for $950 that returns $1,000 at maturity 11 months later. The note pays no interest; instead, your entire return is determined by the amount of the discount ($50 in this example). Banker's acceptances, commercial paper, and other short-term instruments frequently use this approach to compensate the buyer.

Disintermediation. When individuals (or other entities) take money out of savings accounts and put the funds in money market accounts.

Dividend Exclusion. Regular (not S) corporations can exclude from income 70% of dividends received. If the corporation owns 20% or more of the stock of the other corporation, it can exclude 80%. A 100% exclusion is provided for 80% plus owned corporations.

Dividend Payout Ratio. The ratio of the annual dividend to the earnings of a company. Stable, mature companies (such as utilities) typically have a high payout ratio.

Due Diligence. The thorough investigation of a potential acquisition candidate, real estate investment, etc. Often used to refer to the investigation of a company for an initial public offering.

Due-On-Sale. A clause in a mortgage that stipulates any balance remaining on a mortgage is due when the underlying property is sold.

Earnings Form. Business interruption insurance where the payment is a specified amount only when the loss is caused by an insured peril.

Embezzlement. Theft or use of money or property by an individual in whose care the money or property had been entrusted.

Endorsement. A written agreement modifying a standard insurance policy to meet certain conditions or to complete a policy.

Entity. A partnership, corporation, LLC, S corporation, trust, estate, or joint venture of any kind recognized for tax purposes.

Equity Kicker . See Kicker , below.

Escalation. 1. Additional rent payments owed by a tenant based on the increase in the costs of operating the building. See Base, above. 2. A clause in a purchase contract providing for upward adjustment of the contract price if specified contingencies occur.

Excess Liability Insurance. A policy that covers losses that exceed those covered under another policy. For example, your regular policy covers losses up to $300,000. You purchase an excess liability policy that covers losses from $300,000 to $2,000,000. In effect, an excess liability policy is one with a very high deductible. Also known as an umbrella policy.

Experience Rating System. Insurance premiums in such a system are based on the insured's past experience.

Extra-Expense Insurance. A policy that pays for any extraordinary expenses incurred to keep a business in operation after a loss caused by an insured peril.

Extra Risk. An insured that does not fall within the standard risk range. Insurance can only be obtained for a higher than normal premium or with less coverage.

Fair Market Value. The price at which an item can be sold by a willing seller to a willing buyer, neither of which are under any pressure to buy or sell. Furthermore, it's assumed that both parties are dealing rationally, have knowledge of relevant facts, and are not related.

Fidelity Bond. A bond which pays an employer up to an amount stated in the bond for losses caused by dishonesty or infidelity on the part of an employee.

Fiduciary . A person to whom property is entrusted to hold, control, or manage for another. The fiduciary of a trust is the person who is legally responsible for managing the assets of the trust in a competent manner.

Fixed Costs. Costs that do not vary with the number of units produced. For example, depreciation. In the long run all costs are variable and some costs have both a fixed and variable component.

Fixed Price Contract. A contract which provides for a firm price.

Flow-Through Entity. An entity where the income, losses, and certain other items of income and deduction are passed through to the owners. For example, partnerships, trusts, and S corporations.

Forward Supply Contract. A contract for future supply of definite quantities of goods or services over a fixed period.

Free and Clear. In real estate the term is used to indicate that the investment analysis has ignored any debt on the property. (Debt can distort the analysis by increasing the return if the interest rate is lower than the rate of return on property and vice versa if the interest rate is higher.)

Full Absorption Costing. Method of computing costs that starts with Direct Costs (materials, direct labor, variable overhead) but adds non-variable overhead.

Full Costs. All costs including Direct Costs and general and administrative expenses as well as selling expenses.

Garage Liability Insurance. A policy for businesses that work with autos. The policies provide coverage for operations in progress and completed operations as well as the premises.

General Crime Exclusions. Refers to perils in an insurance policy that are excluded because they are usually covered under another type of policy.

General Property Form. A standard form for insuring commercial buildings and their contents.

Graduated Payment Mortgage. A loan where the initial payments are lower than the amount needed to amortize the loan. Debt service grows each year till it reaches a set amount. Used to increase the affordability of a home or real estate investment.

Gross Lease. As opposed to a net lease , a gross lease is one where the tenant is responsible for either none of the increase in operating expenses of the building, or only the amount above a stop. If a base or stop is involved, the lease is sometimes known as a modified gross lease.

Hard Costs. The direct costs of acquiring a business (such as the purchase price), constructing a building (brick and mortar), etc., as opposed to legal, accounting, consulting, financing, costs, which are called soft costs.

Hedged Position. A hedged position occurs if you own a second asset that should move in the opposite way the first asset would react to changes in the market. For example, you own a stock and a put and/or a call on the stock.

Holdback. The portion of a loan not paid out to the borrower until a certain requirement is completed. For example, a lender may release 10% of the total amount of a loan on completion of the foundation, an additional 15% when rough plumbing is in, etc.

Hold Harmless. An agreement where one party agrees to release another party from any legal liability that may occur as the result of a specific event.

Immediate Notice. In insurance parlance, a clause requiring the insured to provide notice to the insurer (or a representative) as soon as reasonably possible following a loss.

Implied Warranty. A warranty that is assumed or assumed to be part of a contract despite the fact that it is not expressly stated.

Imprest Funds. Funds set aside as a cash reserve for expenditures expressly designated. Also, a petty cash fund.

In-the-money. For options, if exercising the option will result in a gain, the option is in-the-money. For a call option, it is in-the-money if the market price of the stock is greater than the exercise price. A put option is in-the-money if the market price of the stock is less than the exercise price.

Indirect Costs. Costs that can't be directly related to the cost objective or a product.

Industrial Property Form. An all-risk or specific peril type of insurance for manufacturers or businesses engaged in processing.

Inflation Endorsement. A clause in a homeowners policy where the coverage is automatically increased periodically to account for changes in a price index.

Insured Bonds. Generally, municipal bonds that are covered by insurance against default (loss of interest or principal). The insurance premium is paid by the issuer. Insured bonds generally have a lower yield because of this protection.

Intangible Asset. An asset that is a right and nonphysical, as opposed to equipment, buildings, etc which are tangible assets. Examples include copyrights, patents, trademarks, goodwill, capitalized advertising costs, computer software, leases, licenses, etc.

Intangible Costs. Expenditures incurred to create an intangible asset. For example, legal fees to negotiate a lease, the cost to acquire a license, etc.

Integrated Operations. Two or more business operations which are conducted as though they were one single economic unit.

Interest-Only Loan. A loan where the borrower pays only interest and not principal during the course of the loan. Some loans have an interest-only period, then require payment of interest and principal. The total amount borrowed is payable as a balloon payment at maturity. Sometimes referred to as a bullet loan.

Interim Financing. Short-term financing that's conditional upon securing intermediate or long-term financing. Also known as a bridge loan.

Interim Statement. A financial report that covers only a part of the company's year. Often used to refer to a quarterly financial statement.

Joint-and-Last Survivor Annuity. A type of annuity where income is payable during the lifetimes of two or more annuitants and continues until the death of the last survivor.

Joint-and-Last-Survivorship Option. When paying out the proceeds of an insurance policy, payments continue until the death of the last survivor of two persons.

Junior Mortgage. A lien that is below that of another mortgage. The holder of a junior mortgage can usually be satisfied only after a more senior lender is paid off. Thus, the interest rate on a junior mortgage is usually higher.

K-1. The information form from a partnership, S corporation, trust or estate, which provides the flow-through income and losses to be reported on an investor's individual return.

Kicker. An additional benefit a lender or investor receives as an inducement to make the loan or investment. For example, a lender may receive an Equity Kicker allowing him to receive a share of the income from the property if it exceeds a specified amount or giving the lender warrants to purchase shares of stock in the investment at a price below market value.

Kiting. Generally, it's the action of drawing checks on one account while depositing checks in another account and depending on the float to avoid overdrafts. A common form of embezzlement.

Latent Defect. A defect which could not be discovered by ordinary and reasonable inspection.

Leasehold Interest. The right to the use of real property created by a lease. If the rent payable on the lease is below the current market, the lease has a number of years to run and is for a very desirable property, etc. the lease can be a valuable asset, particularly if the space can be subleased.

Lessee. A party who rents property from another under a lease.

Lessor. A party who owns property and leases it to a tenant.

Level Premium Plan. Premiums due on an insurance policy that remain level throughout the term, regardless of any dividends that may be paid.

Leverage. 1. Financial leverage is the act of increasing the return on an investment by borrowing some of the funds at an interest rate less than your return on the project. 2. Operating leverage has the same objective, but you increase your return by increasing cheaper fixed costs. Leverage can be positive or negative. If the return on an investment is greater than the cost of borrowing, leverage is positive. If the return is less, leverage is negative.

Lien. A type of encumbrance that makes designated property security for a debt or for an obligation. For example, a mortgage or a tax judgment.

Life Income Period-Certain Annuity. The annuitant is guaranteed payments for the rest of his life, but should he die before a certain time, there is a payout based on a minimum number of payments.

Like-Kind Exchange. A tax device for deferring gain on the transfer of a property by exchanging it for similar property. For example, you exchange investment property in New Hampshire for investment property in Colorado. If you receive no cash or unlike property, there is no tax on any gain.

Limited Liability Company. A entity created under state law that is taxed like a partnership (i.e., income and losses are passed through to the partners), but where the liability of the owners is limited to their investment in the company. That is, they can't be held personally liable for the debts of the company.

Limit of Liability. When an insured is covered by more than one policy for a loss, each insurer pays according to a predetermined formula.

Limited Partner. An investor in a partnership whose personal liability is limited. Such investors are generally considered passive for income tax purposes.

Limited-Pay Life. Premiums on a life insurance policy that are payable for a stated period or until the insured reaches a certain age.

Liquidated Damages. A specific sum of money, set as part of a contract, to be paid by one party to the other if the first should default on the contract.

Liquidity Premium. The part of an interest rate or other return that is intended to cover the fact that the investment is illiquid.

Liquidity Risk. The risk that a party will not be able to have enough cash to meet its obligations as they come due.

Loan Commitment. A agreement by a lender to make a loan in the future if all the conditions in the agreement are satisfied.

Loan-to-Value Ratio . The percentage a lending institution will loan to the appraised value of a property. For example, if the property is appraised for $100,000 and a bank will loan only $70,000, the loan-to-value ratio is 70%.

Long Position. In stocks, bonds, etc. it means you own the stock, bond, option, etc. Often just referred to as simply long.

Long Bond. A bond that matures in more than 10 years.

Lost Instrument Bond. A bond that guarantees that the owner of a lost stock, bond, etc. certificate or other financial instrument will hold the firm harmless against loss if it will issue a replacement certificate.

Lowest Responsible Bidder . The bidder who is awarded a contract because his bid is lower than any of the other bidders whose reputation, past performance, and business and financial capabilities are acceptable.

Lump Sum. A price for a group of goods or services where there is no breakdown of price for the various items.

Manufacturer's Output Policy. An insurance policy that covers the loss of property owned by a manufacturer but located off the premises.

Manufacturing Costs. All costs necessary to manufacture the product.

Market-Value Clause. A clause in an insurance policy that allows for the settlement of a claim based on the market value rather than the actual cash value.

Material Participation. Regular, substantial, and continuous involvement in a business on the part of either the taxpayer and/or spouse. Allows losses from trades or businesses to be deducted without limitation under the passive loss rules. Applies to S corporations and partnerships.

Maturity Date. The date on which a loan, mortgage, bond, etc. is due and any outstanding principal must be paid.

Mechanic's Lien. A claim in favor of mechanics, contractors, laborers or material suppliers against a building or other structure. The lien can only be filed by persons who worked on the building or supplied materials.

Modified Adjusted Gross Income. Your AGI (adjusted gross income) computed without considering any passive activity loss, IRA or SEP plans, taxable social security or the deduction for one-half of the self-employment tax.

Mortgagee. A lender who loans money to a mortgagor. The loan is usually secured by real estate or other property.

Multiple Line Insurance. An insurance policy that combines both liability and property damage coverage and insures against a range of perils.

Naked Position. An investor is said to hold a naked position if he holds only a stock, bond, put, call, etc. If he holds both the underlying asset and a put, call, etc. he is said to have a hedged position.

Named Nonowner. A policy designed to protect nonowners who drive an uninsured vehicle.

Name Schedule Bond . A fidelity bond that covers only the persons listed.

Negative Amortization. A situation where the outstanding principal on a loan increases because debt service payments are insufficient to cover even all the interest, and the unpaid interest is added to the principal amount.

Net Capitalized Cost. In leasing, it's the price of the vehicle after deducting manufacturer's discounts, dealer participation allowances, and cap cost reduction (down payment) from the manufacturer's suggested retail price.

Net Operating Income. In real estate parlance, it's gross income less operating expenses but before items such as debt service, brokerage commissions, tenant improvements, and other capital items.

Net Lease Property. Property where the tenant or lessee pays most, if not all, of the expenses. The tenant may pay the expenses directly, or reimburse the landlord. If the tenant is responsible for all the expenses, the lease is often called triple net or NNN. For tax purposes, a net lease is where the deductions allowed solely by reason of IRC Sec. 162 (general business expenses) are less than 15% of gross rents from that property or property where the lessor is either guaranteed a specific return or is protected in whole or part against loss of income. Deductions allowed solely by reason of Sec. 162 are deductions other than interest, taxes and depreciation.

Nonqualified Retirement Plan. Nonqualified plans are designed to provide benefits to company owners, executives, and highly compensated employees. Unlike qualified plans, nonqualified plans are not required to cover rank-and-file employees, and neither the amount that can be contributed to the plan nor the amount of benefits that they can pay are limited by law. Because nonqualified plans are not required to meet the standards set in law for qualified plans, they do not receive the preferential tax treatment that is accorded to qualified plans. Moreover, any assets that are set aside to prefund benefits under a nonqualified plan are subject to the claims of the plan sponsor's creditors in the event that the plan sponsor enters bankruptcy.

Nonmanufacturing Costs. Costs not related to the manufacture of a product.

Nonpassive Activity. A trade or business in which the taxpayer materially participates, that is, on a regular continuous, and substantial basis. Losses can be deducted without limitation as to the passive loss rules. Income cannot be offset by passive losses, except those passive losses remaining after disposition of a passive activity.

Nonprobate Property. Property owned by a decedent or in which the decedent had an interest on the daste of his or her death which passes to an heir by provisions other than a will or the laws of intestacy. That can include assets held jointly or by a trust, life insurance not payable to the estate, etc.

Nonrecourse Loan. A loan where the debtor does not assume personal responsibility for the loan. CAUTION. Such a loan has special tax implications.

Notice as Soon as Practicable. A clause in an agreement that requires one party to give notice to the other party as soon as practical, relative to all the circumstances.

Notice of Claim or Suit. A provision in an insurance policy that requires the insured to forward to the insurer immediately all notices received by the insured.

Office Burglary and Robbery Policy. An insurance policy for businesses that have no stock or merchandise for sale; the policy only covers the contents of the office.

Office Personal Property Form. An insurance policy that covers all risks related to occupancy of an office for physical damage.

Open-End Contract. A contract in which the quantity and/or duration is not specified.

Open-End Lease. A lease in which the lesse assumes the risk for depreciation at the end of the lease. That is, if the equipment is worth less at the end of the lease than the residual value set at the beginning of the lease, the lessee must pay the difference.

Open-End Mortgage. A mortgage where the amount that can be borrowed with the property as security can be increased, i.e., there is no fixed amount of principal.

Opportunity Cost. The cost of not doing something. For example, if your business has excess cash and uses it to purchase an item of equipment, the opportunity cost is the interest you would have earned had that money been earning interest in say, a money market account.

Option Premium. The amount paid for an option.

Option. The right to buy (or sell) or lease a property at a certain price for a limited period of time. For example, you pay $2,000 for a option to purchase 20 acres of land for $200,000. The option expires in one year. Depending on the terms, you may or may not be able to sell the option.

Out-of-the Money. In options, it means the current exercise of the option would produce a loss. Thus, a call option is out-of-the-money if the current price of the asset is less than the exercise price; a put option is out-of-the-money if the current price of the asset is more than the exercise price.

Overage Rent. Additional rent usually based on a tenant's sales. Such an agreement usually contains one or more breakpoints. For example, you rent space in a mall. The lease calls for you to pay 3% of all sales above $500,000. In 1998 your sales are $700,000. You owe the landlord $6,000 (3% of $200,000). Also referred to as Percentage Rent .

Overhead Costs. Costs related to manufacturing that are not Direct Costs (i.e., materials, direct labor and variable overhead). Overhead costs include fixed, variable, and semivariable costs.

Owner's Equity. The amount of an owner's interest in an entity that is at-risk should the company become bankrupt. In the case of a corporation, it consists of capital stock, additional paid-in capital, and retained earnings. Capital stock may be par value or no par value. If par value, the total capital stock is equal to the number of shares outstanding times the par value. Additional paid-in capital is additional amounts paid for the stock over an above the par value. Retained earnings come from the net profits of the corporation. Profits increase retained earnings, losses and distributions decrease them.

Example-- Madison Inc. issues 200 shares of its common stock to Fred Flood for $60 per share, for a total of $12,000. Madison's common stock has a par value of $0.50. On the balance sheet the transaction would be recorded as capital stock of $100 (200 shares times $0.50 par value), and additional paid-in capital of $11,900 (the difference between the amount received for the stock and the par value). Assume further than Susan Newly buys 200 shares the following week for $70 per share ($14,000 total). The capital stock amount is the same ($100), but now the paid-in capital amount is increased by $13,900.

P.I.T.I. Payments that cover Principal, Interest, property Taxes, and Insurance.

Parol Evidence Rule. Provides that the formal, written contract governs the parties. Statements made before the drafting of the policy can not be used in evidence.

Participation. Where two or more lenders share in a mortgage loan. Often used on large loans to spread the risk.

Passive Activity. For taxes, rentals, regardless of participation and trades or businesses where you do not materially participate. Losses are limited to passive income plus a special $25,000 allowance for rental real estate.

Passive Loss. Loss from a passive activity, that is, rental or trade or business in which you do not materially participate.

Passive Income. Income from a passive activity. In other words, income from rentals or businesses in which you do not materially participate.

Payback Period. The length of time it will take for an investor to recoup his cash outlay. Often used as a quick way to analyze an investment, usually in personal property. For example, a new machine will cost you $10,000. It will generate income before depreciation of $3,000 the first year; $4,000 the second year and $3,000 the third year. The payback period is 3 years.

Period Costs. Expenses related to a particular accounting period.

Performance Bond. A contract of guaranty by a successful bidder to protect the buyer from loss due to the bidder's inability to complete the contract as agreed.

Personal Articles Floater. Generally, an endorsement on an insurance policy that provides for all-risk coverage on scheduled (named) valuable personal property.

Personal Property. Generally, tangible and intangible assets other than buildings, leasehold improvements, land, etc. The tax law often limits personal property to physical assets such as equipment, furniture, etc. that can be moved without affecting a building or other structure.

Personal Property Floater. Generally, an endorsement on an insurance policy that covers all property individually owned no matter where it's located.

Personal Property Replacement Cost Endorsement. A provision in an insurance policy that changes the recovery from an actual cash value basis to a replacement cost basis.

Placed in service. Strictly a tax term. You can only start depreciating property (or take a Sec. 179 expense election) when the property is 'placed in service.' That means when the property is available for use in its assigned function. For example, you purchase a machine in 2006 and it's not delivered until 2007. Even though you may have paid for the machine in 2006, you can't begin depreciation until 2007. Similarly, if the machine is delivered in 2006, but the technicians didn't arrive to install and test the machine until 2007, you can't begin depreciation until 2007.

Points. Payments to secure a loan, stated as a percentage of the borrowed amount. For example, 2 points is 2% of the loan.

Policy Face Amount. The maximum amount payable under an insurance policy, so-called because the amount is printed on the face of the policy.

Portfolio Income. Interest, dividends, royalties, and gains from the sale of stocks and bonds as well as other investment activities. Portfolio income is generally not considered passive income. Portfolio income cannot be offset by passive losses except those passive losses remaining after the disposition of a passive activity.

Power of Sale. A clause in a mortgage or similar instrument that gives the lender the power to sell the property in case of a default. The property must generally be sold at auction, but the lender does not have to go through a court proceeding to do so.

Percentage Rent. See Overage Rent.

Prepayment Privilege. The right to prepay a mortgage without penalty.

Price At The Time of Delivery . A term used in sales contracts when market prices are so volatile that a vendor will not give a firm price or use an escalator clause but will only agree to charge the price charged other customers for similar purchases on the day he ships or delivers the goods.

Price Protection. An agreement by a vendor with a purchaser to grant the purchaser any reduction in price which the seller may establish prior to, or within a certain time after, shipping of the purchaser's order.

Prime Costs. Direct labor and material costs.

Private Letter Ruling. These are written pronouncements from the IRS interpreting the Internal Revenue Code with respect to a specific set of facts and circumstances. Letter rulings arise from a taxpayer's request to interpret the law, usually before engaging in a transaction. For example, when two corporations decide to merge, they typically request a letter ruling to insure the transaction will be tax free. The ruling applies only to the taxpayer requesting it and cannot be cited as precedent. However, letter rulings often give important insight into the way the IRS would rule under similar circumstances. Despite the filing fee and legal costs involved in obtaining a ruling, if the tax consequences are substantial, a ruling is often advisable.

Private Limited Partnership. A partnership that does not have to be registered with the SEC, but can have no more than 35 accredited partners.

Private Placement. Also known as a private offering, the sale of an investment or business to a small group of accredited investors that conforms to certain exemptions from registration with the SEC.

Pro Forma. Generally, financial information that reflects a hypothetical or projected transaction. For example, reconstructing a balance sheet or income statement to reflect the effects of a loan. (The loan will increase assets and liabilities and interest expense.) Also used to describe projected financial statements in general.

Pro Rata Liability Clause. When more than one insurance company covers a property, the clause provides a formula for sharing liability among the companies.

Probate Property. Assets owned by the decedent in his or her name alone or as tenant in common on the date of his or her death that pass by will or the laws of intestacy to another party.

Publicly Traded Partnership. A partnership whose interests are traded on an established securities market or are readily tradable on a secondary market.

Purchase Money Mortgage. A mortgage made by the seller to a buyer. Often a junior mortgage used in connection with the sale of investment property or a business where the buyer can't meet the full purchase price through his own and borrowed funds.

Qualified Retirement Plan. A plan that meets requirements specified in the Internal Revenue Code with respect to eligibility, participation, and benefits is qualified to receive preferential tax treatment. Specifically, in a qualified plan (1) the employer can deduct from income the amount that it contributes to the plan as a business expense, (2) the amount that the employer contributes to the plan on behalf of plan participants is not treated as income to the participants, and (3) the investment earnings of a qualified pension trust are not taxed as income to either the employer or the plan participants. A qualified retirement plan may be either a defined benefit plan or a defined contribution plan. Assets held in trust by a qualified retirement plan are protected from creditors' claims if the plan sponsor enters bankruptcy.

Qualified Terminable Interest Property (QTIP). Property that qualifies for the marital deduction provided the property passes from a decedent to a surviving spouse, the surviving spouse has a qualified income interest for life in the property and the executor of the decedent's estate makes an irrevocable election to qualify the QTIP property for the marital deduction. REO. An abbreviation for real estate owned. Used to identify properties that have been foreclosed on and carried on the balance sheet of a lender.

Rate of Return on Assets. In real estate parlance, the net operating income from a property divided by the price of the property.

Real Estate Investment Trust. A special corporation that is generally not taxed under federal law. The trust (REIT) must invest funds in real property. Income is taxed to the shareholders.

Recapture. See Depreciation Recapture , above.

Recharacterization Rules. Generally, rules which reclassify passive income as nonpassive. This type of income should not be reported on Form 8582 and cannot be offset by passive activity losses except those passive losses remaining after disposition of a passive activity.

Reformation. The act of changing the terms of a contract to meet the original intentions of the parties.

Registered Bond. See Bearer Bond , above.

Release Price. The amount that must be repaid on a development loan when a property under a blanket mortgage is sold.

Renewable and Convertible Term. Term life insurance that is both renewable for an additional period without evidence of insurability and convertible into a permanent or whole life policy. A policy may contain one or both clauses.

Replacement Cost. The cost of replacing a property with one having similar amenities and functionality, but not identical improvements.

Reporting Forms. Commercial property insurance where the insurer requires periodic reports on the value of the inventory to ensure coverage is adequate and the premiums commensurate with the risk.

Reproduction Cost. The cost of reproducing the improvements on a property so as to duplicate the original property.

Residual Value. The value at the end of a term. In leasing, it's the value, either fair market value or some stated value, at the end of the lease. In finance and accounting, it's the fair market value at the end of the equipment's design or economic life or life in the business.

Revenue Ruling. This is an official IRS interpretation of the Internal Revenue Code or Regulations on a specific issue. The ruling may have been prompted by a Technical Advice Memorandum , taxpayer request, court decision, etc. As opposed to a Private Letter Ruling , a revenue ruling usually has broader implications and can be cited by the IRS or taxpayers as precedent. Revenue rulings carry less weight than IRS regulations.

Revocable Beneficiary. In the case of an insurance policy, the policyholder, in the case of a trust, the grantor, has the right to change the beneficiary at any time.

Revocable Trust. A trust, generally to hold income producing property, that may be changed or revoked at the will of the grantor. The grantor (person creating trust and transferring property to it) receives and is taxable on any income from the property, but the property passes directly to the beneficiaries on the death of the grantor. The assets pass to the beneficiaries without going through probate. While not part of probate, since the trust is revocable, the assets are part of the decedent's taxable estate.

Revolving Credit. In commercial lending, an agreement between the creditor and debtor allowing the borrower to draw down funds up to a stated maximum for a stated period. In addition to interest on the outstanding amount, the lender usually charges a fee to make the funds available. Any amount repaid allows the borrower to draw down additional funds up to the maximum.

Right of Survivorship. In jointly held property, the right of one owner to automatically take title to the property on the death of the other owner.

Risk Transfer. The shifting of risk from one party to another. The purchase of insurance is one example of transferring risk. Since there is an opportunity for tax evasion in risk transfer, the IRS may scrutinize such transactions.

Roll Down. The act of moving from one option position to a different one having a lower exercise price.

Roll Forward. The act of moving from one option position to a different one having a later expiration date.

Roll Up. The act of moving from one option position to a different one having a higher exercise price.

Round Trip Trade. The purchase and sale of a stock, commodity, etc. in a very short period of time.

Rule of 72. Formula for determining the time it will take for your money to double for a certain compound interest rate. Divide 72 by the interest rate in percent; the result is the number of years. For example, 72 divided by 10% equals 7.2. The actual number of years it will take your money to double at 10% is about 7.28 years.

S Corporation. A corporation that is not taxed as a separate entity. Instead, the income, losses, credits, etc. are passed through to the shareholders.

Sale-Leaseback. A transaction where the owner of a property sells it to another party but retains occupancy by immediately leasing it back from the buyer. Frequently a way of raising cash or getting rid of an unwanted property.

Sandwich Lease. Where a tenant subleases part or all of his space to other tenants.

Self-Charged Interest. The portion of interest charged on a lending transaction between a flow-through entity (S corporation or partnership) and its partners or shareholders which represents a payment a person makes to himself or herself. Stated differently, it is the amount the lender/borrower reports as interest income/expense which is equal to the lender's/borrower's distributive share of the flow through entity's interest deduction. The interest payments received are generally treated as portfolio income.

Self-Rented Property. Personal or real property a taxpayer rents to an entity in which the taxpayer materially participates. For example, you rent real property you own personally to an S corporation in which you materially participate.

Seller Carry-Back. Also known as seller financing, it's where the seller provides some or all of the financing in connection with the sale of real estate or a business.

Semivariable Costs. Expenses that have both a fixed and variable component.

Sensitivity Analysis. An approach to taking into account risk by calculating the changes in potential returns if the original assumptions change. For example, by using your best estimates for costs and revenue you compute that a new machine will provide you with 18% return. If revenues are 10% lower, the return will be 14%.

Settlement Options. Different ways of taking the proceeds from a life insurance policy. For example, rather than receiving the proceeds in a lump sum, the beneficiary can request the insurer to pay the amount out over several years. Interest is added to the principal to reflect the delayed payout.

Short. An investor is said to be short if he has sold stock that he does not own, that is, he has sold stock he borrowed from his broker. In the case of an option, the seller or writer has a short position if he has sold the option short.

Significant Participation Activity. A business in which you participate more than 100 hours without materially participating. If the total hours of participation in your significant participation activities (SPA) exceed 500, the total net income from SPAs is treated as nonpassive.

Specific Coverage. An insurance policy or endorsement where coverage is limited to the property specified in the contract.

Specified Perils Contract. An insurance policy on real or personal property where only coverage is limited to the enumerated perils. For example, flood insurance covers only floods, no other peril.

Spendthrift Clause. A clause in a trust, insurance policy, etc. that guards the assets against unwise use by the beneficiary. In some cases the assets cannot be attached by creditors. Often used by parents to provide for children who might otherwise waste the assets or pledge them.

Standby Loan. A commitment by a lender to make a loan on specified terms. Generally, neither the potential borrower nor lender anticipate the loan will be taken down. Instead, it's anticipated it will be replaced by a permanent loan.

Straddle. Any of a number of possible investment positions where the investor owns both a put and a call or protection from a drop in the market and a rise in the market. The put and call would have both the same exercise price and the same expiration date. An investor is long in a straddle if he buys a put and a call; he is short a straddle if he writes a put and a call.

Straight Deductible. In an insurance contract, a constant amount or percentage of value which the insured bears on every loss.

Straight-Line Depreciation . Depreciation (also applies to amortization) where the amount for each period is equal. For example, annual depreciation on a $12,000 asset with a 10-year life would be $1,200 per year.

Subordination Clause. In real estate lending, a clause in a mortgage that allows it to become junior to subsequent liens.

Subrogation . The right of an insurer to substitute itself for the victim in recovering the amount of the loss from the party responsible for the loss. For example, you rent space in a warehouse. A worker accidentally sets fire to the building. The landlord collects from his insurance company but the insurer files a claim against your business.

Substantial Part of an Activity. An identifiable piece or unit of a larger activity, such as a separate division or branch, or a separate product line of a business with several lines or divisions. Generally used in connection with the passive activity loss rules.

Subvented Lease. A special lease provided by vehicle or equipment manufacturers that make it more attractive than a lease offered through regular sources. In essence, the lease is subsidized by the manufacturer.

Suspended Losses. Passive losses which are carried forward indefinitely until the taxpayer has passive income or there is an entire disposition of the activity. Also called carryover or carryforward losses.

Take-Out. Also know as a permanent loan commitment, it's a promise by a lender to replace a construction loan with a permanent one.

Tangible Asset. A physical asset such as equipment, buildings, etc. rather than an intangible asset.

Target Normal Cost. Under the Pension Protection Act, a defined benefit plan's target normal cost for a year is the present value of benefits expected to be accrued in the current year, including benefits that are attributable to increases in compensation.

Tax Deferred. A term that indicates no tax is currently due on the transaction or income received. Instead, tax is due at a later date when the transaction is closed. Earnings in an IRA account are tax deferred until you retire and the income is distributed to you. A tradein is a tax deferred transaction. You report no gain until you sell the property received in the tradein.

Technical Advice Memorandum. This is written advice issued by the IRS national office at the request of an IRS district office or Appeals Office on a technical or procedural question, usually arising during the audit of a taxpayer's return or a claim for refund. Like Private Letter Rulings these are reported to the public, but are not official IRS pronouncements. Thus, they cannot be cited as precedent.

Tenancy at Will. The occupancy of property at the will of the owner. The agreement may be written or oral, but the tenant may leave at any time without liability and the owner can evict the tenant at any time.

Term. The life of a contract, agreement, loan, etc.

Term Contracting. A technique in which a source of supply is established for a specified period of time. The contract often has an estimated or minimum quantity.

Term Insurance. A type of life insurance issued for one or more years specified in the contract. As opposed to whole life, the policy does not build any cash value.

Tiered Entities. Partnerships or trusts or S corporations invested in other partnerships or trusts or S corporations.

Treasury Inflation Protection Securities (TIPS) These are treasury bonds where the principal is indexed to the CPI. The total yield is made up of current interest payments and semi-annual CPI adjustments to principal. While only the interest is paid, both portions are taxable. Because of the CPI adjustment, the interest rate is relatively low.

Trial Balance. A list of all the ledger accounts with their balances at any point in time.

Vacancy and Collection Loss. The reduction in potential gross income from vacancies and bad debts in real property. For example, a building has 50,000 square feet of space that should rent for $10 per square foot. The gross potential rent is $500,000 per year. However, vacancy and collection losses are projected to reduce that by $40,000 to $460,000 annually.

Valuable Papers Insurance. Insurance that provides coverage for the destruction or loss of papers that have intrinsic value.

Value-Added Tax. A tax imposed on each step in the production process. The measure of the tax is the difference between the cost of the item to the taxpayer and the price at which the item is transferred to the buyer. For example, you purchase raw materials for $100. After machine work and assembly, you sell the item for $150. The tax is levied on the $50.

Value Date. In banking parlance, the date on which the funds become available to the depositor.

Vanishing Point. The point at which premiums on a cash value life insurance policy will end. See Vanishing Premium, below.

Vanishing Premium. A provision in many cash value life insurance policies where the premium, after a certain point in time, will end with the policy remaining in force. That time is usually estimated based on the premium and the assumed rate of return.

Variable Costs. Costs that change in direct proportion to the amount of product manufactured. For example, the cost of direct materials depends on the number of units produced. Contrast with Fixed Costs.

Variable Life Insurance. A life insurance policy where the face amount of the policy is not fixed (as in whole life) but can increase or decrease based on the performance of the investments purchased by the premiums. Like whole life, premiums are constant and the policy builds cash value.

Variance. In cost accounting, it's the difference between the actual cost and the standard cost of the cost components. In financial accounting it's the difference between actual income and expenses and budgeted amounts, or between comparative statements (e.g., prior year to current year).

Vendor's Lien. Collateral for a note or credit advanced by the seller of the property.

Vertical Integration. The IRS definition is a relationship between two businesses where one supplies more than 50% of its property or services to another, or where one receives more than 50% of its property or services from the other.

Voidable. A transaction that can be annulled if one of the parties asserts a claim to do so.

Voting Stock. An interest in a corporation where the shareholder is entitled to vote. Depending on its charter, a corporation can issue voting and nonvoting stock. Preferred stock is usually nonvoting.

Voting Trust Certificate. A document representing a beneficial interest in a voting trust.

Umbrella Liability. See Excess Loss Insurance .

Unsecured Creditor. A creditor who does not have any security (collateral) for the debt he holds.

Waive. To voluntarily relinquish a right or privilege.

Waiver. In insurance terminology, a provision in the policy releasing the insurance company from liability to pay for specified losses that would normally be covered under the policy.

Waiver of Mistake or Informality . The act of disregarding errors or technical nonconformities in a bid which do not affect the substance of the bid and will not adversely affect the competition between bidders.

Waiver of Premium Provision. A provision available in many disability income and life insurance policies that allow the policy to stay in force without the payment of premiums if the insured has been disabled for a specific periof of time (typically 6 months on life insurance policies).

Warehouse Receipt. A document showing ownership of goods stored in a warehouse. The receipt can be used to transfer ownership of the goods without having to ship the actual goods to the buyer.

Warranty Deed. A deed that warrants that the seller is transferring title free and clear of any encumbrances. Should the title turn out to be defective, the buyer has recourse to the seller.

Wash Sale. A tax term describing the sale of stock or securities and the purchase of identical securities within 30 days before or after the sale. For tax purposes, any losses on the transaction are disregarded.

Watered Stock. Generally, stock that is overvalued because of accounting gimmicks or where unauthorized shares have been issued.

Waybill. Document prepared by a common carrier that provides the details of the route shipped goods are to follow.

When Issued. Refers to a security that is being traded but has not yet been formally issued. Usually reserved for new issues of stocks and bonds and stocks that have split. For example, Madison Inc. is selling for $100 per share. The stock has been split 2-for-1 but new shares have not been issued. It may trade for $50 per share (the post-split price) on a 'when issued' basis. Usually abbreviated WI in financial newspapers.

White Goods. A term used in retailing and economic measurement for large household appliances such as stoves, washers, dryers, refrigerators, etc.

White Knight. When a company is the target of a hostile takeover it may seek out another company who is more friendly to rescue it. The friendly company is known as a white knight.

Whole Life Insurance . A life insurance policy that not only pays the face amount on the death of the insured, it builds cash value because the required premiums exceed the amount necessary to provide pure insurance protection. Premiums are level throughout the life of the policy. Contrast with Term Life.

Winding Up. The processing of liquidating a company. Includes paying off creditors, selling and/or distributing assets to owners, etc.

Window Dressing. Sprucing up a balance sheet, financial statement, etc. for a monthly, quarterly, or annual report. Examples include trying to collect receivables just before the end of a quarter; booking sales at the very end of the period; in the case of a mutual fund, selling less desirable or investments with losses and replacing them with higher quality issues before the statement date.

Withdrawal Plan . In the case of mutual funds, a plan that allows shareholders to receive regular payments of income or capital gains.

Without Prejudice. A legal term indicating that an action is made without any admission or waivers. For example, where a party offers to settle a legal dispute without admitting liability.

Without Recourse. Where a creditor's only recourse in the case of default is to sell any pledged property. Also applies to the factoring of receivables, loans or notes, etc.

Wire Transfer. The transfer of money between two banks using a wire transfer system or the Federal Reserve's transfer system. Banks usually charge an extra fee for this service, but the transfer to your account is done faster, hence the funds wired from another party are available quicker than if you received the check and your bank waited for the funds to clear.

Working Capital. Amounts invested in cash, accounts receivable, inventory, and other current assets. Unless otherwise indicated, it refers to net working capital; that is, current assets less current liabilities.

Work in Process. Jobs currently being processed. Usually refers to manufactured goods where some work has been performed on the raw materials, but the goods are not yet ready for sale.

Workers' Compensation Benefits. Life and health insurance coverage for employees only while they are on the job. Medical expenses, disability income, dismemberment, and death benefits are provided under the policies.

Workout. An attempt by a debtor and creditor to avoid foreclosure or bankruptcy when the debtor is in financial difficulty. The creditor often will accept less than full payment of debts in order to avoid receiving less in a bankruptcy case.

Workweek. The normal number of days and hours employees are scheduled to work for a week. In economic statistics, a measure of the economy. The longer the workweek, the more employees in general are working and is a reflection of whether employers are hiring new employees are just extending the hours of current employees.

Wraparound Mortgage. A mortgage where an existing loan (or loans) on a property are not paid off on sale, but retained, and a new loan is made. The old loans are often retained because they are at an interest rate below the current market. The new lender makes the payments on the existing loans.

Write Off. To reduce the value of an asset on a company's books to the fair market value, or fair market value less the cost of disposal. For example, a computer purchased for $5,000 and depreciated down to $3,000 is now found to be worth no more than $500. You write off $2,500 to show the asset at the current market value. Also known as write down. This procedure is generally not allowed for tax accounting purposes.

Write Up. Generally, the reverse of Write Off, above. Usually not allowed for accounting purposes.

Yearly Renewable Term. A term policy covering one year that is renewable each year without having to show insurability.

Yield. See Current Yield , above.

Yield Curve. A graph that plots the yields of similar quality bonds on the y-axis and the time to maturity on the x- axis. Generally, the longer the time to maturity, the higher the interest rate. When the yield on long-term bonds is less than that on shorter maturities, the yield curve is said to be inverted .

Yield Equivalence. The interest rate at which a tax-exempt bond and a taxable one have the same after-tax return. The theory assumes that both bonds are of similar quality. To find the equivalent taxable yield of a tax-exempt bond, divide the tax-exempt yield by 1 minus your marginal tax rate.

Example-- A tax-exempt bond is yielding 6%; your marginal tax rate is 31%. One minus .31 is .69. Divide that into .06; the result is .08695, or 8.7%. Thus, a 6% tax-exempt yield is equivalent to an 8.7% fully taxable yield.

Yield Spread. The difference in yields among bonds of the same maturity that's caused by differences in the quality of the bonds.

Yield to Call. Similar to Yield to Maturity but the call price and earlier call date are substituted for maturity date when calculating the yield. For example, Madison Inc. issues a bond for $1,000 at 10%. The bond matures 15 years later, but is callable at the end of 7 years at 105 ($1,050). The higher call price and the shorter term is used to compute the yield.

Yield to Maturity . A method of calculating the yield on a bond that takes into account not only the periodic interest payments and the purchase price, but also the return of principal at maturity. (See Current Yield above.)

Zero-Base Budgeting. A technique where each budget starts from zero, rather than starting with the prior budget and increasing or decreasing it. Theoretically, under zero-base budgeting, every expense has to be justified. That should foster a closer look at all expenditures.

Zero Balance Account. A checking account designed to have a zero balance. The bank transfers enough funds from an interest bearing account each day to pay all checks presented to the bank for payment.

Zero Coupon Bond. A bond that does not pay any current interest. It's purchased at a deep discount from the face value. Income results from the gradual appreciation of the bond. For example, a $100,000 zero coupon bond with 10 years to maturity with a stated interest rate of 8% should sell for $46,319. While you receive no cash interest payments, you must pay tax every year on the increase in value. Zero coupon bonds tend to be more volatile than regular bonds.

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