Cash Based Income Tax Returns
Q: Where can you find what the tax liability would be to the individual to determine whether the distributions and loans to partners were exceeding the individual's tax liability?
A: It is not specifically stated anywhere on the business or personal income tax returns. However, the best estimate of the amount of distributions and loans necessary to meet the income tax obligation on a company's taxable income is the owner's effective income tax rate. The rate is the total tax from the personal tax returns divided by adjusted gross income from the personal tax returns.
To compute total tax, you will need both the federal and state personal income tax returns for the owner or partner. The adjusted gross income is generally equal at both the federal and state level.
Q: Regarding Poll Question 5, the $17,781 cash flow deficit was made up of all of the above.
A: The $17,781 cash flow deficit is the cash position before payment of long-term debt as scheduled. Once we included distributions and loans, the company had exhausted all operating cash flow and found itself at a cash flow deficit of $17,781. It was compelled to draw on their line of credit and/or obtain additional outside debt to meet the current portion of long-term debt due and payable. Please refer to the Solutions to the Poll questions for further clarification.
Course overview: Cash Based Income Tax Returns