Tax Glossary

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1031 Exchange: Like-kind exchange that lets real estate investors defer recognition of gains by reinvesting sale proceeds into qualifying replacement property.

179D Deduction: Energy-efficient commercial building deduction for qualifying lighting, HVAC, and building envelope improvements that meet specified energy savings standards.

45L Energy Efficient Home Credit: Tax credit for eligible energy-efficient single-family and multifamily homes that meet or exceed required efficiency and certification standards.

A

ASHRAE Standard: Energy standard used as the baseline for determining whether commercial building improvements qualify for certain energy-related tax incentives.

Accelerated Depreciation: Method of depreciating assets faster in early years to increase current tax deductions and improve near-term cash flow.

Adjusted Basis: Tax basis after increases (such as improvements) and decreases (such as depreciation taken), used to compute gain, loss, and recapture.

Alternative Depreciation System (ADS): A slower depreciation method required in certain situations that spreads deductions over a longer recovery period than the general system.

Amortization: The systematic write-off of certain costs or intangible assets (such as Section 174 research or some intangibles) over a specified number of years.

At-Risk Rules: Rules limiting deductible losses to the amount a taxpayer has “at risk” in an activity, such as cash invested and certain types of debt.

B

Bonus Depreciation: Additional first-year depreciation on qualifying property, allowing a large percentage of cost to be deducted in the year placed in service, subject to phase-down schedules.

Building Components: Individual parts of a property (carpeting, lighting, cabinetry, paving, landscaping, etc.) that may be reclassified into shorter-life asset categories in a cost segregation study.

Building Envelope: Exterior elements of a building (walls, roof, windows, doors, insulation) that separate indoor and outdoor environments and strongly influence energy performance.

Business Component: Product, process, software, technique, formula, or invention that is the focus of qualifying research under the R&D tax credit rules.

Business Interruption Coverage: Insurance coverage that helps replace lost income and pay continuing expenses when operations are disrupted by a covered event.

Business Tax Credits: Credits that directly reduce tax liability (dollar-for-dollar) for activities such as research, energy efficiency, hiring, or investing in certain areas.

C

Capital Asset: Property held for investment or business use (such as real estate, equipment, or some intangibles). Treatment as a capital asset affects capital gain versus ordinary income tax treatment.

Capital Expenditure (Capex): Money spent to acquire, improve, or extend the life of property or equipment. Generally must be capitalized and recovered through depreciation or amortization instead of expensed immediately.

Capital Gain vs Ordinary Income: Capital gain is profit from the sale of a capital asset; ordinary income includes items like wages, rent, and certain recapture, often taxed at different rates.

Capital Improvement: Expenditure that adds value, prolongs the life, or adapts property to a new use. Typically must be capitalized and depreciated rather than deducted as a current repair.

Capitalization Policy: Company’s internal policy defining thresholds and criteria for capitalizing versus expensing purchases and improvements.

Capitalized Interest: Interest on construction or improvement debt that is added to the basis of the asset and recovered through depreciation instead of being expensed immediately.

Construction in Progress (CIP): Costs on projects that are not yet placed in service; CIP generally does not start depreciating until the asset or project is ready for use.

Cost Segregation: Engineering-based analysis that breaks a building’s cost into shorter-life components (personal property and land improvements) to accelerate depreciation and increase early tax deductions.

Cost Segregation Study: Formal report that identifies, documents, and reclassifies building costs into different depreciable lives (for example, 5, 7, 15 years vs 27.5 or 39 years).

Current Deduction: An expense that can be fully deducted in the year it is incurred, as opposed to being capitalized and recovered over time through depreciation or amortization.

D

De Minimis Safe Harbor: Election that allows a taxpayer to expense items under a specified dollar threshold instead of capitalizing them.

Depreciable Life / Recovery Period: Number of years over which an asset is depreciated for tax purposes under MACRS (for example, 5-year, 7-year, 15-year, 27.5-year, 39-year).

Depreciation: The tax mechanism that spreads the cost of tangible property over its useful life, allowing a portion of the cost to be deducted each year.

Depreciation Recapture: Tax on prior depreciation taken when property is sold; recapture rules differ for Section 1245 and Section 1250 property.

E

Economic Development Incentives: State and local programs (grants, abatements, credits) designed to attract or retain businesses and encourage capital investment and job creation.

ENERGY STAR Certification: Energy performance label for buildings or homes that meet specified efficiency criteria; can help qualify for certain tax credits and incentives.

Energy Modeling: Simulation comparing a building’s expected energy performance to a baseline standard, used to support 179D and other energy incentives.

Entity Choice / Entity Structure: Decision to hold assets through an LLC, partnership, S corporation, or C corporation, each with different tax and legal implications.

Exchange Period (1031): 180-day period after the sale of relinquished property during which replacement property must be acquired in a 1031 exchange.

F

Fixed Asset Review: Analysis of existing fixed asset schedules to identify misclassified assets, missed write-offs, or additional incentives such as bonus or dispositions.

Fixed Asset Schedule: List of a taxpayer’s depreciable assets, their costs, recovery periods, methods, and accumulated depreciation.

Four-Part Test (R&D): IRS framework that defines qualifying research: permitted purpose, technological in nature, elimination of uncertainty, and process of experimentation.

G

General Depreciation System (GDS): Default MACRS depreciation system used for most property, allowing shorter recovery periods and accelerated methods compared to ADS.

Gross Income: All income from whatever source derived, before deductions. It is the starting point for determining taxable income.

H

High-Efficiency HVAC: Heating, ventilation, and air conditioning systems that exceed baseline efficiency standards and may contribute to energy-related tax incentives.

Holding Period: Length of time an asset is owned, which affects whether gains are treated as short-term or long-term for tax purposes.

I

Identification Period (1031): 45-day window after the sale of relinquished property during which replacement property must be identified in writing.

Insurance to Value: Measure comparing insurance coverage limits to the true replacement cost of property, used to avoid being underinsured.

Internal-Use Software (IUS): Software developed primarily for a company’s internal use; subject to special rules for R&D credit eligibility.

J

Job Creation Credits: Incentives tied to hiring and retaining employees, often based on payroll amounts or number of new full-time positions.

L

Land Improvements: Assets associated with land (parking lots, sidewalks, curbs, landscaping, site lighting) that are depreciated over shorter lives than the building itself.

Leasehold Improvements: Improvements made to leased property by a landlord or tenant; depreciation and incentive treatment depend on ownership and terms of the lease.

Lighting Power Density (LPD): Measure of lighting wattage per square foot, often used in energy modeling to determine whether lighting systems meet efficiency thresholds.

Look-Back Study: Retrospective review of prior-year assets and projects to identify missed depreciation or credits that can be claimed via accounting method changes or amended returns.

M

MACRS (Modified Accelerated Cost Recovery System): Primary IRS depreciation system that defines lives and methods for most tangible property placed in service after 1986.

Method Change (Form 3115): Automatic or non-automatic accounting method change that allows taxpayers to correct depreciation methods or capitalization practices and claim catch-up deductions.

N

Net Operating Loss (NOL): When allowable business deductions exceed income for the year. NOLs can often be carried forward to offset taxable income in future years.

Non-Dilutive Grants: Funding provided to businesses that does not require giving up equity; includes many federal, state, and local grant programs.

P

Partial Asset Disposition (PAD): Election that allows a taxpayer to write off the remaining basis of a specific component (such as a roof or HVAC) when it is replaced.

Passive Activity Loss Rules: Restrictions that limit the ability of certain taxpayers to deduct losses from passive activities against non-passive income.

Personal Property (for Cost Segregation): Movable or non-structural property (carpet, equipment, specialty electrical, process piping, etc.) that can often be classified as shorter-life for depreciation.

Pilot Model / Prototype: Initial or trial version of a product or process used to evaluate and resolve technical uncertainty; often a key part of qualifying research.

Placed-in-Service Date: Date an asset is ready and available for its intended use. Drives when depreciation and many incentives start.

Property Tax Abatement: Temporary reduction or elimination of property tax for qualifying projects or developments.

Q

Qualified Improvement Property (QIP): Interior improvements to nonresidential buildings that can qualify for shorter lives and bonus depreciation if specific rules are met.

Qualified Intermediary (QI): Third party that holds 1031 exchange proceeds and facilitates compliance with the timing and identification rules.

Qualified Research Expenses (QREs): Costs that can generate the R&D tax credit, typically including wages, supplies, and certain contract research.

R

R&D Tax Credit: Federal and often state-level credit that rewards companies for qualifying research and development activities aimed at creating or improving products, processes, or software.

Repair vs Capitalization Analysis: Review under the tangible property regulations to determine whether an expenditure can be expensed as a repair or must be capitalized and depreciated.

Replacement Cost Valuation: Estimate of what it would cost to rebuild or replace property with similar materials and quality at current prices, often used in insurance underwriting.

Risk Assessment (Real Estate Portfolio): Evaluation of exposures across properties, including physical, operational, and financial risks, used to inform insurance and tax strategy.

Routine Maintenance Safe Harbor: Provision allowing certain recurring maintenance costs to be expensed if they meet specified frequency and expectation tests.

S

Safe Harbor Election: Specific election (such as de minimis, small taxpayer, or routine maintenance safe harbors) that simplifies treatment of certain costs.

Sales and Use Tax Exemption: Relief from sales or use tax on qualifying purchases such as manufacturing equipment or construction materials in certain jurisdictions.

Section 1245 Property: Generally personal property and certain other assets that may be subject to ordinary income recapture when sold.

Section 1250 Property: Generally real property (buildings and structural components) with its own depreciation recapture rules upon sale.

Section 168(k): Code section governing bonus depreciation, including eligible property types and applicable percentages.

Section 174: Code section covering research and experimental expenditures, including capitalization and amortization requirements.

Section 263A (UNICAP): Rules requiring certain indirect costs to be capitalized into inventory or self-constructed assets rather than expensed currently.

Section 41: Code section that authorizes the research credit and defines what qualifies as research for credit purposes.

Section 481(a) Adjustment: Catch-up adjustment (positive or negative) when a taxpayer changes accounting methods, such as fixing depreciation or capitalization errors.

Shell vs Tenant Improvements: Shell refers to the base building structure; tenant improvements are build-outs for specific occupants. They can have different lives and cost segregation treatment.

Small Taxpayer Safe Harbor: Safe harbor that allows certain small taxpayers to deduct some building-related costs instead of capitalizing them, subject to limits.

Stepped-Up Basis: Increase in a property’s tax basis, often due to purchase, improvement, or death of an owner, which can impact depreciation and gain recognition.

Structural Components: Parts of a building that are integral to its structure (roof, walls, floors, main plumbing, main electrical) and typically stay in 39- or 27.5-year lives.

Substantially All Test: Requirement that substantially all (generally at least 80%) of the research activities for a business component involve a process of experimentation.

Substantiation / Contemporaneous Documentation: Records such as time tracking, project notes, and technical reports that support the fact and amount of qualified research and expenses.

T

Tangible Property Regulations (TPRs): IRS rules that govern when costs to acquire, improve, or repair tangible property must be capitalized versus expensed, and how dispositions are treated.

Tax Basis: Starting point for depreciation and gain/loss calculations, usually the purchase price plus certain acquisition and improvement costs.

Tax Credit: A dollar-for-dollar reduction of tax owed, such as R&D, energy, or hiring credits, which directly reduces the final tax liability.

Tax Deduction: An amount that reduces taxable income (for example, depreciation, interest, or certain expenses), indirectly reducing tax by the applicable tax rate.

Taxable Income: Income remaining after subtracting allowable deductions from gross income. This is the amount on which income tax is calculated.

U

Utility Rebates: Cash payments or bill credits from utility companies for installing energy-efficient equipment or systems.

Z

Zero Energy Ready Home (ZERH): Advanced efficiency standard indicating a home is highly efficient and ready for renewable energy; may be tied to enhanced 45L tax credits.