BUS 419 CH 7 KEY TERMS

Question	Answer
Accrued market discount	a ratable amount of the market discount at the time of purchase (based on the number of days the bond is held over the number of days until maturity when the bond is purchased) that is treated as interest income when a bond with market discount is sold before it matures.
Active participant in a rental activity	an individual who owns at least 10 percent of a rental property and participates in the process of making management decisions, such as approving new tenants, deciding on rental terms, and approving repairs and capital expenditures.
Amortization	the method of recovering the cost of intangible assets over a specific time period.
At-risk amount	an investor’s risk of loss in a worst-case scenario. In a partnership, an amount generally equal to a partner’s tax basis exclusive of the partner’s share of nonrecourse debt.
Basis	a taxpayer’s unrecovered investment in an asset that provides a reference point for measuring gain or loss when an asset is sold.
Bond discount	the result of issuing bonds for less than their maturity value.
Bond premium	the result of issuing bonds for more than their maturity value.
Bond	a debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing.
C corporations	a corporate taxpaying entity with income subject to taxation. Such a corporation is termed a “C” corporation because the corporation and its shareholders are subject to the provisions of Subchapter C of the Internal Revenue Code.
Capital asset	in general, an asset other than an asset used in a trade or business or an asset such as an account or note receivable acquired in a business from the sale of services or property.
Certificate of deposit (CD)	an interest-bearing debt instrument offered by banks and savings and loans. Money removed from the CD before maturity is subject to a penalty.
Collectibles	a type of capital asset that includes a work of art, a rug or antique, a metal or gem, a stamp or coin, an alcoholic beverage, or other similar items held for investment for more than one year.
Dividend	a distribution to shareholders of money or property from the corporation’s earnings and profits.
Exchange traded fund (ETF)	diversified portfolios of securities owned and managed by a regulated investment company similar to mutual funds except they are traded on exchanges and the shares trade throughout the day like ordinary stock listings.
Ex-dividend date	the relevant date for determining who receives a dividend from a stock. Anyone purchasing stock before this date will receive current dividends. Otherwise, the purchaser must wait until subsequent dividends are declared before receiving them.
Face value	a specified final amount paid to the owner of a coupon bond on the date of maturity. The face value is also known as the maturity value.
First-in, first-out (FIFO) method	an accounting method that values the cost of assets sold under the assumption that the assets are sold in the same order in which they are purchased (i.e., first purchased, first sold).
Flow-through entities	legal entities, like partnerships, limited liability companies, and S corporations, that do not pay income tax. Income and losses from flow-through entities are allocated to their owners.
Investment income	income received from portfolio type investments. Portfolio income includes capital gains and losses, interest, dividend, annuity, and royalty income not derived in the ordinary course of a trade or business. When computing the deductibility of investment interest expense, however, capital gains and dividends subject to the preferential tax rate are not treated as investment income unless the taxpayer elects to have this income taxed at ordinary tax rates.
Investment interest expense	interest paid on borrowings or loans that are used to fund portfolio investments. Individuals are allowed an itemized deduction for qualified investment interest paid during the year.
Long-term capital gains or losses	gains or losses from the sale of capital assets held for more than 12 months.
Market discount	the difference between the amount paid for a bond in a market purchase rather than at original issuance when the amount paid is less than the maturity value of the bond.
Market premium	the difference between the amount paid for a bond in a market purchase rather than at original issuance when the amount paid is greater than the maturity value of the bond.
Maturity	the amount of time to the expiration date, or maturity date, of a debt instrument. The maturity of a debt instrument is generally the life of the instrument, at which point a payment of the face value is due or the instrument terminates.
Maturity value	the amount paid to a bondholder when the bond matures and the bondholder redeems the bond for cash.
Maximum 15 percent rate amount	threshold for the 15 percent rate to apply to long-term capital gains. Any 0/15/20 percent capital gains included that results in taxable income above the maximum zero rate amount and up to the maximum 15 percent rate amount are taxed at 15 percent. The threshold is based on a taxpayer's filing status and income.
Maximum zero percent rate amount	threshold for the zero percent rate to apply to long-term capital gains. Any 0/15/20 percent capital gains included in taxable income up to the maximum zero percent amount are taxed at 0 percent. It is based on a taxpayer’s filing status and income level.
Mutual fund	a diversified portfolio of securities owned and managed by a regulated investment company.
Net capital gain	the excess of net long-term capital gain for the taxable year over net short-term capital loss for such year.
Net investment income	(for determining deductibility of investment interest expense) gross investment income reduced by deductible investment expenses.
Net long-term capital gain	the excess of long-term capital gains for the taxable year over the long-term capital losses for such year.
Net long-term capital loss	the excess of long-term capital losses for the taxable year over the long-term capital gains for such year.
Net short-term capital gain	the excess of short-term capital gains for the taxable year over the short-term capital losses for such year.
Net short-term capital loss	the excess of short-term capital losses for the taxable year over the short-term capital gains for such year.
Operating income	the annual income from a trade or business or rental activity.
Operating loss	the annual loss from a trade or business or rental activity.
Original issue discount (OID)	a type of bond issued for less than the maturity or face value of the bond.
Passive activity loss (PAL) rules	tax rules designed to limit taxpayers’ ability to deduct losses from activities in which they don’t materially participate against income from other sources.
Passive investments	direct or indirect investments (other than through a C corporation) in a trade or business or rental activity in which the taxpayer does not materially participate.
Portfolio investments	investments producing dividends, interest, royalties, annuities, or capital gains.
Qualified dividends	paid by domestic or certain qualified foreign corporations that are eligible for lower capital gains rates.
Qualified small business stock	stock received at original issue from a corporation with a gross tax basis in its assets both before and after the issuance of no more than $50,000,000 and with 80 percent of the value of its assets used in the active conduct of certain qualified trades or businesses.
Short-term capital gains or losses	gains or losses from the sale of capital assets held for one year or less.
Specific identification method	an elective method for determining the cost of an asset sold. Under this method, the taxpayer specifically chooses the assets that are to be sold.
Tax basis	the amount of a taxpayer’s unrecovered cost of or investment in an asset; see also adjusted tax basis.
Tax shelter	an investment or other arrangement designed to produce tax benefits without any expectation of economic profits.
Treasury bond	a debt instrument issued by the U.S. Treasury at face value, at a discount, or at a premium, with a set interest rate and maturity date that pays interest semiannually. Treasury bonds have terms of 30 years.
Treasury note	a debt instrument issued by the U.S. Treasury at face value, at a discount, or at a premium, with a set interest rate and maturity date that pays interest semiannually. Treasury notes have terms of 2, 5, or 10 years.
U.S. savings bonds	debt instruments issued by the U.S. Treasury at face value or at a discount, with a set maturity date. Interest earned from U.S. bonds is paid either at maturity or when the bonds are converted to cash before maturity.
Unrecaptured §1250 gain	a type of §1231 gain derived from the sale of real estate held by a noncorporate taxpayer for more than one year in a trade or business or as rental property attributable to tax depreciation deducted at ordinary tax rates. This gain is taxable at a maximum 25 percent capital gains rate.
Wash sale	the sale of an investment if that same investment (or substantially identical investment) is purchased within 30 days before or after the sale date. Losses on wash sales are deferred.
Zero-coupon bond	a type of bond issued at a discount that pays interest only at maturity.

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