Q: When we say distributions are payments to cover taxes, what kind of taxes are covered, e.g., payroll taxes, income taxes, taxes on dividends, etc.?
A: Several business entities – Subchapter S corporations, partnerships, limited liability companies, and proprietorships – as identified by IRS guidelines are required to “pass through” to owners the responsibility to pay federal and state income taxes on the entity’s earnings. Distributions are paid to those partners or owners for the purpose of making cash available to them with which to pay the federal and state income taxes on company earnings when filing their individual Form 1040 without tapping personal resources.
Those business partners or owners are also required to pay taxes on personal earnings and are subject to standard withholding and estimated tax payments on all other forms of earnings
Q: In your experience does global DSC trump or considered more important than borrower DSC?
A: As is often the case in making a loan decision, it depends on the specific situation. Some companies may be so tightly intertwined with owners or related party companies that a hiccup in one may be felt immediately by the other. Under that circumstance, global DSC takes priority.
In other cases, the relationship may be such that there is far less financial interaction, and the related party companies or owners may operate independent of one another. In this situation, borrower DSC should be the focus when underwriting a loan.
Course overview: Guarantor Analysis, Global Cash Flow, and the Second Way Out