Business Types and Taxation Methods

Question 1

Active Income

Answer 1

income generated from a trade or business in which an investor actively and materially participate; otherwise, called passive income

Question 2

Capital Gain

Answer 2

profit from the resale of an asset (selling price minus book value)

Question 3

Capital Asset

Answer 3

a real and tangible asset such as real estate or machinery

Question 4

Cash Flow

Answer 4

a measure of a company’s liquidity, consisting of net income plus non-cash expenditures (such as depreciation charges)

Question 5

Financial Asset

Answer 5

assets that are not real on their own, for example, bonds, stocks, certificates of deposit

Question 6

Inflation-adjusted Tax Brackets

Answer 6

annual income tax brackets that increase by an assumed rate of inflation. The ratio was 1.7% from 1998 to 1999

Question 7

Marginal Tax Rate

Answer 7

a rate a taxpayer pays on his or her last unit of income

Question 8

Modified Accelerated Cost Recovery System (MACRS)

Answer 8

a depreciation method in which assets are classified according to their specifications and to the number of years over which they can be depreciated.

Question 9

S Corporation

Answer 9

small business with a corporate form but in which all profits (and losses) are passed through to the shareholders, as in a partnership

Question 10

Triple Tax

Answer 10

a situation where taxes are paid three times: income tax on corporate income, tax on stockholders’ dividends, and tax on dividend income of the firm from its outside investment