D. Rhodes, CPA, Writer and Editor
Today we will cover business terms and concepts you need to know in order to take control of your finances. These aren't just random definitions – these are the specific terms that can make the difference between a decent side hustle and a business that builds wealth for you and your family.
Basic Tax Forms & Filings
Adjusted Gross Income (AGI): Your take-home pay from all income sources after subtracting certain expenses - it's what the IRS uses as your starting point to calculate taxes.
Standard Deduction: Think of it like a store's "no receipt needed" return policy - the IRS automatically lets you subtract a set amount from your income ($14,600 for single filers, $29,200 for married filing jointly and $21,900 for head of household filers for tax year 2024) without requiring you to prove any expenses.
Itemized Deductions: The opposite of the deduction we just discussed. This is like the store telling you to keep all your receipts and bring them in for the return policy. This method is used if after you list out specific expenses, they add up to more than the deduction we just discussed (standard deduction).
Schedule C: Think of it as your business's financial diary - where you tell the IRS every dollar your business earned and spent during the year.
Business Structure Terms
Pass-Through Entity: Like a mail carrier for your business profits - income passes straight through the business to your personal tax return, where you pay the taxes. This is how many small businesses are taxed.
Reasonable Compensation: This is a baseline the IRS expects you to pay yourself when electing to be taxes as a S-Corp. If done correctly, this helps you save thousands of dollars in taxes. Because of that the IRS watches this like a hawk.
Double Taxation: This only applies to a select few small businesses. If you are structured as a C-Corporation then you essentially pay taxes twice on the same money. You pay taxes on profits first, then when those profits are paid out to you as the owner (shareholder) and any other “owners” (shareholders) as dividends, you pay taxes again on that same money.
*A owner/shareholder is simply someone who owns part of a corporation, like how someone might own shares of Apple or Nike.
Credits & Deductions
Tax Credit (Dollar-for-Dollar): If you get a $1,000 tax credit, you save exactly $1,000 off your tax bill. Like using a $1,000 gift card - it reduces what you owe by precisely $1,000.
Tax Deduction (Not Dollar-for-Dollar): If you get a $1,000 tax deduction, it only reduces your taxable income by $1,000. The actual tax savings depend on your tax bracket. For example:
If you're in the 22% tax bracket, a $1,000 deduction saves you $220 (22% of $1,000)
If you're in the 12% tax bracket, the same $1,000 deduction saves you $120 (12% of $1,000)
So while a $1,000 tax credit saves everyone $1,000, a $1,000 deduction's value varies based on your tax bracket - making credits generally more valuable than deductions.
Above-the-Line Deductions: Like VIP discounts that you get regardless of other deals - these reduce your income even if you don't itemize.
Below-the-Line Deductions: Like store coupons that only work if your total purchase exceeds a minimum - these help only if they exceed your standard deduction ($14,600 for single filers, $29,200 for married filing jointly and $21,900 for head of household filers for tax year 2024).
Refundable Tax Credit: Like a store gift card that gives you cash back if you don't spend it all - you get the full amount even if it exceeds your tax bill.
Understanding these terms isn't about becoming an accounting or tax expert - it's about making informed decisions for your business and having productive conversations with your accountant.
The next time you're meeting with your accountant or tax/financial advisor, keep these concepts with you. That's how you stay in control of your families legacy and financial future.
Remember: Our ultimate goal is to help you save time and money, while building wealth and legacy.
The choice is yours, but the clock is ticking. Reach out today so we can help get you from where you're at, to where you want to be. Your move boss.
*This article provides general information, not individual tax advice. Tax situations vary; consult with a qualified tax professional, like myself, for advice specific to your circumstances.
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