Q: Why is the interest income on Line 5 non-cash?
A: The $428 of interest income at Line 5 on Schedule K-1 (Form 1065) is Larry Crevin's pro-rata share of the amount of interest income earned by Lafayette Partners in 2018. The cash from the interest income went to Lafayette Partners. The partnership, in turn, provides information about Larry Crevin's pro-rate share of total interest income to Larry Crevin, who must report that amount on Schedule B. The amount is combined with other interest income on Schedule B and carried to Line 2b on Crevin's Form 1040. The interest was cash to the partnership but non-cash to Larry Crevin.
The only cash flowing from the partnership to Larry Crevin in 2018 was the $41,496 of distributions reported at Line 19A in Part III on Schedule K-1 (From 1065).
Since Larry Crevin is a 60% owner of the partnership, Lafayette Partners actually earned $713 in interest income in 2018 or (($428) / (0.60)) = $713.
Q: This is getting very difficult to follow. Over half of the people got this Poll Question wrong, which means to me that most people are not following this. Is there a better way to learn this given that this is so confusing and hard to follow?
A: This is indeed confusing and hard to follow. Nothing about income tax returns is ever simple. The best advice we can offer is to review the slide deck after the session, then go over the written solutions to the poll questions that we make available after the session, as well as carefully review the written solutions for all steps in the exercise, which we also make available after the session. Finally, to test your understanding, we suggest that you take the five question online Review Quiz and read carefully through the explanations when you receive the results a moment after submission.
Q: Can you review how we calculate FICA taxes again? Where is the $128,400 coming from?
A: FICA withholding taxes are computed as 6.2% of salary, up to a salary maximum of $128,400 for 2018. The maximum salary level changes every year. In 2019, for example, it is set at a maximum of $132,900. In 2020, it is scheduled to increase to $139,700. The 6.2% rate does not change, only the maximum salary level changes.
Note, too, that the $128,400 amount was listed in the Personal Cash Flow Worksheet attached to the Exercise.
Q: On slide 65, when calculating liquid assets, why are you not adding the Cash in Bank amount of $106,355?
A: We don't include cash in the checking account when we’re trying to estimate the amount of liquid assets, since that is the cash source of his normal living expenses and personal debt obligations. We assume Crevin would use that cash immediately for living expenses or conserve it for emergencies in face of a cash flow crisis. Keep in mind, too, that estimating ready cash in a crisis is a highly subject process. Therefore, it seems prudent to error on the conservative side in making estimates of this nature.
Q: Would we not discount the non-recurring capital gains such as the sale of a rental property?
A: We agree that in looking ahead we would discount or exclude any repeat performance. But in the year the asset sale occurred, we need to identify the cash inflow or outflow to achieve a full understanding of the cash revenue for the guarantor in that year.
Course overview: Guarantor Analysis and the Second Way Out