Q: Why wouldn't you just take the federal tax amount per line #57 in the amount of $117,993? If you use the $59,792 plus the $80,000, he gets a refund of $21,799. You would then have to show it in the next year as income?
A: We use the $59,792 of federal income tax withholding and the $80,000 of estimated federal income tax payments since both of those amounts represented cash outflows for personal income taxes in 2005. We need to capture the cash amount of the outflows.
There is indeed a refund due of $21,799 since Larry Crevin overpaid his federal income taxes in 2005. That refund is not a taxable cash inflow, or taxable income, in 2006 at the federal level. However, any refund received from state income tax authorities is considered taxable income at the federal level and must be reported as such.
Q: Why don't you take the minimum required payment on credit cards that would include the interest that you estimated?
A: We could do so, using the year-end balance of $27,054 as the average balance throughout the year. If we did so and assumed the credit card lenders required a payment of 3.00% a month on the outstanding balance, then our estimate of credit card payments – including principal and interest – for the year would be (0.0300) x (12) x ($27,054) = $9,739. That amount is greater than the $2,500 estimate for interest expense only that we used in the personal cash flow computations. As a result, Larry Crevin’s personal cash flow surplus would drop from $354,903 to $347,664. The surplus drops slightly but our conclusions about the strength of the personal guarantee remain unchanged.
Q: Does the Section 179 deduction on K-1 equal depreciation? And if so, why is it subtracted from Schedule E income?
A: Total Coverage, Inc. reports a depreciation expense on the first page of Form 1120S, which does not include the amount of a Section 179 deduction. The owner is allowed to include a further depreciation expense deduction in the form of the Section 179 deduction, which further drives down the amount of company profit he or she must report as personal income.
On schedule E for Larry Crevin, he reports Total Coverage, Inc. profit of $211,037, which includes depreciation expense applied by the company to its fixed assets. In addition, Crevin reports a Section 179 deduction of $52,003, which allows him to reduce reported profit by a further $52,003. Therefore, he enjoys the benefit of standard depreciation, reflected in Total Coverage, Inc.’s taxable profit of $211,037, plus an accelerated depreciation benefit that applies only to him, which decreases his reported income by a further $52,003.
Q: Can you further explain why the $428 interest income shown on the personal K-1 is not counted on personal cash flow?
A: The $428 was cash interest income to Lafayette Partners. In fact, the total cash interest income to Lafayette partners was $713 but, since Larry Crevin owns only 60% of the partnership, his share turns out to be $428.
Crevin must report his share on Schedule B as interest income since it represents his pro rata share of interest income for the company in which he is a 60% owner. But the cash went to the company and not to Crevin. The cash that came directly to Crevin from the partnership was the $41,496 amount reported at Line 19 on his Schedule K-1 (Form 1065).
A: We use the $59,792 of federal income tax withholding and the $80,000 of estimated federal income tax payments since both of those amounts represented cash outflows for personal income taxes in 2005. We need to capture the cash amount of the outflows.
There is indeed a refund due of $21,799 since Larry Crevin overpaid his federal income taxes in 2005. That refund is not a taxable cash inflow, or taxable income, in 2006 at the federal level. However, any refund received from state income tax authorities is considered taxable income at the federal level and must be reported as such.
Q: Why don't you take the minimum required payment on credit cards that would include the interest that you estimated?
A: We could do so, using the year-end balance of $27,054 as the average balance throughout the year. If we did so and assumed the credit card lenders required a payment of 3.00% a month on the outstanding balance, then our estimate of credit card payments – including principal and interest – for the year would be (0.0300) x (12) x ($27,054) = $9,739. That amount is greater than the $2,500 estimate for interest expense only that we used in the personal cash flow computations. As a result, Larry Crevin’s personal cash flow surplus would drop from $354,903 to $347,664. The surplus drops slightly but our conclusions about the strength of the personal guarantee remain unchanged.
Q: Does the Section 179 deduction on K-1 equal depreciation? And if so, why is it subtracted from Schedule E income?
A: Total Coverage, Inc. reports a depreciation expense on the first page of Form 1120S, which does not include the amount of a Section 179 deduction. The owner is allowed to include a further depreciation expense deduction in the form of the Section 179 deduction, which further drives down the amount of company profit he or she must report as personal income.
On schedule E for Larry Crevin, he reports Total Coverage, Inc. profit of $211,037, which includes depreciation expense applied by the company to its fixed assets. In addition, Crevin reports a Section 179 deduction of $52,003, which allows him to reduce reported profit by a further $52,003. Therefore, he enjoys the benefit of standard depreciation, reflected in Total Coverage, Inc.’s taxable profit of $211,037, plus an accelerated depreciation benefit that applies only to him, which decreases his reported income by a further $52,003.
Q: Can you further explain why the $428 interest income shown on the personal K-1 is not counted on personal cash flow?
A: The $428 was cash interest income to Lafayette Partners. In fact, the total cash interest income to Lafayette partners was $713 but, since Larry Crevin owns only 60% of the partnership, his share turns out to be $428.
Crevin must report his share on Schedule B as interest income since it represents his pro rata share of interest income for the company in which he is a 60% owner. But the cash went to the company and not to Crevin. The cash that came directly to Crevin from the partnership was the $41,496 amount reported at Line 19 on his Schedule K-1 (Form 1065).