Glossary

Plain-English definitions of tax and financial terms.

1031 Exchange: A tax-deferred swap of one investment property for another, allowing you to postpone paying capital gains tax.
Add-Backs: Expenses added back to net profit when calculating SDE because a new owner would not incur them. Includes owner salary, one-time costs, and personal expenses run through the business.
Base Period: The time period used to calculate your unemployment benefits, typically the first four of the last five completed calendar quarters.
Benefit Duration: The maximum number of weeks you can collect unemployment benefits in a benefit year.
Billable Hours: Hours a contractor can charge a client for — typically less than total hours worked due to admin, marketing, and gaps.
Capital Asset: Property you own for investment or personal use that can generate a capital gain or loss when sold.
Capital Gain: The profit from selling a capital asset for more than you paid for it.
Capital Loss: The loss from selling a capital asset for less than your cost basis.
Cost Basis: The original value of an asset for tax purposes, usually the purchase price plus certain adjustments.
Customer Concentration: The risk created when a large percentage of revenue comes from a single customer. Buyers typically discount businesses where one customer exceeds 15-25% of revenue.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. The valuation metric for larger, manager-run businesses (typically above ~$1M EBITDA).
Earnings Disregard: The amount of part-time earnings you can keep without reducing your unemployment benefit.
Effective Tax Rate: The average rate you actually pay across all your income — total tax divided by total income.
Employer FICA Contribution: The 7.65% of your salary that your employer pays for Social Security and Medicare — a hidden benefit contractors don't receive.
Federal Unemployment Tax Act: The federal law imposing a payroll tax on employers to fund the unemployment insurance system.
Filing Status: A category that determines your tax bracket thresholds, standard deduction, and eligibility for certain credits.
Holding Period: How long you owned an asset before selling it, which determines whether gains are taxed at short-term or long-term rates.
Long-Term Capital Gains: Profits from selling assets held for more than one year, taxed at preferential federal rates of 0%, 15%, or 20%.
Marginal Tax Rate: The tax rate applied to your next dollar of income — the highest bracket you've reached.
Modified Adjusted Gross Income: Your adjusted gross income (AGI) with certain deductions added back, used to determine eligibility for tax benefits and surtaxes like the NIIT.
Net Investment Income Tax: A 3.8% federal surtax on investment income for individuals with MAGI above $200,000 (single) or $250,000 (married filing jointly).
Owner Dependency: The degree to which a business requires the current owner to maintain revenue and operations. High dependency reduces valuation.
PTO Value: The dollar value of paid time off — days you're paid without working, which contractors must fund from their hourly rate.
Partial Unemployment: Working reduced hours while collecting a portion of your unemployment benefits.
Recurring Revenue: Revenue that repeats automatically through subscriptions, retainers, or contracts without requiring a new sale each period.
Self-Employment Tax: A 15.3% tax on net self-employment earnings that funds Social Security and Medicare — the contractor equivalent of FICA.
Seller's Discretionary Earnings (SDE): The total cash an owner-operator takes from a business, calculated as net profit plus owner salary, benefits, and legitimate add-backs.
Short-Term Capital Gains: Profits from selling assets held for one year or less, taxed as ordinary income at rates up to 37%.
Standard Deduction: A fixed amount subtracted from gross income before tax brackets are applied — used by about 90% of filers.
State Unemployment Tax Act: State-level payroll taxes on employers that fund the state unemployment insurance trust fund.
Step-Up in Basis: When an inherited asset's cost basis is reset to its fair market value at the date of the owner's death, eliminating all unrealized capital gains.
Taxable Income: Your gross income minus deductions — the amount used to determine which tax bracket you fall into.
Total Compensation: The full value of an employment package including salary, benefits, employer taxes, PTO, and perks — not just base pay.
Unemployment Insurance: A joint federal-state safety net program providing temporary income to workers who lose their jobs through no fault of their own.
Valuation Multiple: A ratio that translates a financial metric (SDE, EBITDA, or revenue) into a business price. Different industries trade at different multiples.
Waiting Period: The unpaid first week after filing an unemployment claim before benefits begin.
Wash Sale Rule: An IRS rule that disallows a capital loss deduction if you buy a substantially identical security within 30 days before or after the sale.
Weekly Benefit Amount: The dollar amount you receive each week in unemployment benefits.
Work Search Requirements: Activities you must complete each week to maintain unemployment benefit eligibility.