For new entrepreneurs, there are plenty of surprises that pop up along the way to beginning a new business and one of the biggest is the change that comes in filing taxes. Doing taxes as an employee is a radically different than it is to do them as a business owner. Business taxes come with their own set of rules, and, more confusingly, a whole new vocabulary. You were already pretty clear about terms like head of household and joint return but a cafeteria plan? We’re still talking about taxes and not lunch, right?
If you’re a first-time business owner and you’ve found yourself checking in with Google for the definition to almost every other word on your online filing forms, take a break and refer to this list for the meaning behind five of the more obscure tax terms.
1. Cafeteria Plan
A cafeteria plan is a plan organized by an employer to give employees the choice of different types of benefits they’d like on a pretax basis. Cafeteria plans are available for employees, their spouses, and dependents and may include benefits such as accident and health benefits, group-term life insurance coverage, and dependent care assistance. Cafeteria plans also need to meet the specifications of section 125 of the Internal Revenue Code, which means the benefits offered to employees can either be taxable or nontaxable.
2. Wash Sales
Wash sales are the selling of a security, like stocks or bonds, at a loss only to repurchase the same security either right before or after the sale. The losses on the transactions are ignored for tax purposes unless a 30-day waiting period occurs. The purpose of a wash sale is to protect investors who have a loss without realizing it, and then wants to use said loss as a tax deduction in that tax year.
SIMPLE is an acronym for Savings Incentive Match Plan for Employees Individual Retirement Account. This is a tax-deferred retirement plan that’s provided by an employee and typically come in two forms: one that looks like a 401(k) plan and one that funds IRAs for employees. If you received at least $5,000 in compensation from the last two calendar years with expectations to receive the same amount or more in the current calendar year, you’re eligible to sign up for SIMPLE.
Or, first in first out, this is a rule that typically applies to the selling of a group of similar items, like shares or inventory. It states that the first items acquired were the first ones sold. This comes into play if the items were made or bought at different times and sold at different prices. Essentially, it’s taking the sales data and organizing it in such a way that the oldest entry is processed first. Keep in mind that if FIFO applies to your business, you need to make sure you have all of the documents and records on hand for your sale so that it matches the information the IRS receives from financial institutions.
5. Golden Parachutes
For any and all executive level employees you have on deck, a golden parachute may be offered. This is an agreement that states that if that employee is let go, he/she will receive certain significant benefits including bonuses, stock options, and severance pay. These are typically given out if there’s a change in ownership, but beware that excess golden parachutes may be subject to tax penalties.