06 Aug Help! My Accountant Is STILL Speaking in Code: 6 More Essential Translations (Part 2)
Welcome back to our translation guide for small business owners who’ve ever sat across from their tax preparer and wondered if they accidentally enrolled in an advanced accounting course. In Part 1, we decoded 7 of the most confusing accounting phrases tax preparers use. Now let’s tackle 6 more terms that make business owners everywhere question their life choices—from meal deductions to cash flow mysteries to the dreaded “110% rule.”
Remember: you’re not stupid if you don’t understand accounting jargon. You’re just normal. And normal people deserve explanations that make sense.
1. “Your meal deduction is limited to 50% unless it qualifies for 100% treatment.”
What they mean: That business lunch is only half deductible under normal circumstances. But if it’s for an employee event, client entertainment under specific conditions, or other qualifying situations, you might get the full deduction.
Simple example: You take a potential client to a $100 lunch to discuss a project. You can deduct $50. But if you take your entire 10-person team to a $1,000 lunch for the company holiday party, you can deduct the full $1,000 because it’s an employee event.
The frustration: The IRS apparently thinks you’re only half-hungry during business meals. The logic is that you would have eaten anyway, so only the “business” portion is deductible.
Pro tip: Keep detailed records of who you ate with and what you discussed. “Lunch with Bob” isn’t going to cut it. “Strategy meeting with Bob to discuss Q3 product launch” is what you’re after.
2. “Positive net income doesn’t mean positive cash flow.”
What they mean: Your profit and loss statement says you made money, but your bank account is laughing at you. You’re profitable on paper but broke in reality.
Simple example: Your consulting firm shows $120k in profit for the year. But $40k of that is in unpaid invoices, you spent $25k on equipment (which doesn’t all show up as an expense), and you made $15k in loan payments (which also don’t show up as expenses). Your actual cash flow? Much less impressive than that $120k profit suggests.
Why this happens: Your profit includes money customers owe you (accounts receivable), inventory you haven’t sold yet, and doesn’t account for loan payments or equipment purchases that don’t show up as expenses.
The reality: This is the small business owner’s existential crisis. You’re simultaneously successful and struggling to make payroll. It’s like being voted “Most Likely to Succeed” while eating ramen for dinner.
3. “Your working capital needs are impacting your cash position.”
What they mean: All your money is tied up in stuff—inventory, money customers owe you, or supplies you bought but haven’t used yet. You’re asset-rich but cash-poor.
Simple example: Your e-commerce business has $50k in inventory, $30k in unpaid customer invoices, and $20k in your bank account. On paper, you have $100k in assets. In reality, you can only spend $20k until someone pays their invoice or you sell some inventory.
The visual: Imagine your business as a house. You’ve got lots of nice furniture (assets), but no money in your wallet (cash). You’re not broke, but you can’t pay for pizza delivery without selling something first.
The solution: If you don’t want to spend what you don’t have to spend, then you need to utilize a Profit First Cash Management system so that your expense decisions are based on cash available, not “funny money”…Cash is still king, even in an accrual based accounting world.
4. “We need to true up your estimated payments against your actual liability.”
What they mean: Time to see if our quarterly tax payment guessing game was accurate. If we guessed wrong, you might owe penalties on top of any balance due.
Simple example: You paid $20k in quarterly estimated taxes throughout the year, but your actual tax bill is $25k. You owe $5k, plus potential penalties for underpayment. If you had paid $22k throughout the year, you’d owe $3k with no penalties because you were close enough.
The stress: It’s like playing tax roulette. Pay too little throughout the year, and you get penalized. Pay too much, and you gave the IRS an interest-free loan.
The strategy: Save for taxes throughout the year, on a fixed percentage, based on a Profit First calculation of profitability.
5. “You’re subject to the 110% rule since your AGI exceeded the threshold.”
What they mean: If your adjusted gross income was over $150,000 last year, you need to pay 110% of last year’s taxes in estimated payments to avoid penalties, not just 100%. This is called “Safe Harbor.”
Simple example: Last year you made $200k and paid $45k in taxes. This year, to avoid penalties, you need to pay estimated taxes of at least $49,500 (110% of $45k) throughout the year—even if you end up owing less than that when you file.
The logic: The IRS figures if you made good money last year, you can afford to pay a little extra as a safety buffer. It’s their way of saying, “Congratulations on your success—now pay up.”
The silver lining: At least you’re making enough money to have this problem. It’s a good problem to have, even if it doesn’t feel like it at tax time. The only sure fire way to pay less in taxes is make less profit. Is paying less in taxes and living on less than you deserve more important to you than enjoying your success and being paid what you deserve? The purpose of a business is to make a profit, not write off more taxes.
6. “We’re moving last year’s net income to retained earnings.”
What they mean: It’s like a savings account that automatically fills up with leftover profits. Any money your business made that you didn’t take out gets moved to this “retained earnings” account on your balance sheet.
Simple example: Your business made $100k profit last year. You took $70k in distributions. The remaining $30k gets moved to retained earnings. It’s still your money, but it’s staying in the business. Next year, if you make $50k profit but take $60k in distributions, you’re drawing $10k from those retained earnings.
Why this matters: Retained earnings represent the cumulative profits you’ve left in the business over the years. It’s your business’s way of keeping score of how much money you could have taken out but didn’t.
Think of it as: Your business’s piggy bank. The money is still yours, but it’s staying in the business for future use.
The Bottom Line
Most tax terminology confusion comes from the gap between how we think about money (cash in, cash out) and how tax preparers think about money (complex rules about when things “count”).
The good news? You don’t need to become a tax expert to run a successful business. You just need to understand enough about the most common accounting phrases to ask the right questions and make informed decisions.
The best tax preparers I’ve worked with can translate their expertise into plain English without making you feel like you need to pass a CPA exam. If yours can’t, it might be time to find someone who speaks human.
After all, business is personal, and the professional who prepares your taxes should remember that behind every small business is a real person trying to build something meaningful. The numbers matter; that’s why understanding them shouldn’t require a secret decoder ring.
This concludes our 2-part series on decoding confusing accounting phrases. Armed with these translations, you’ll be better equipped to understand your tax preparer and make informed decisions about your business finances.
