Q: A Section 179 deduction is limited to $250K at the individual level, so even if the owner has multiple Sub S, partnerships, etc that are flow-throughs, the total can only be $250K at the individual level. If the individual owns a sub S and a C corp would each have the ability to do the full $250K?
A: The full $250K deduction for 2009 could be used to reduce the amount of profit the Subchapter S corporation owners must report on their personal income tax returns. The Subchapter C corporation, if eligible for a Section 179 deduction, could claim the full amount of the deduction since it is a separate taxpaying entity whose depreciation expense has no impact on the tax position of its owners.
Q: Why doesn't the distribution amount show up on line 7 of Schedule M-2?
A: The accountant provided only partial information on Schedule M-2, beginning with ordinary income, followed by specific adjustments. Line 7 on Schedule M-2 indicates that only $37,796 of the 2001 distributions in the amount of $709,446 were drawn from various elements of 2001 operating income.
Q: On Peter Keys' Schedule B there is a line item for Information Access, Inc for $17,301. I'm assuming this is interest from shareholder loans made to the company. Do you consider this actual income/cash flow for is personal cash flow available to service debt? Also, where does this interest income get reported on the business taxes and or K-1s?
A: The $17,301 does indeed represent interest income to Peter Keys from his loans to Information Access, Inc. We cannot be absolutely certain that it is cash without asking the company or Keys specifically. However, it is highly likely that the amount is cash income to Keys. If he is willing to take $581,746 of cash out of the company as his share of 2001 distributions, it stands to reason that he would have few reservations about taking another $17,301 out of the company in the form of interest income to him from loans that he made, grudgingly perhaps, to the company. Therefore, it seems safe to include this amount in the array of cash inflows that determine the amount of personal cash flow available to service company interest-bearing debt.
With respect to the other side of the transaction, Information Access, Inc. included the $17,301 in its 2001 interest expense total of $141,004 at Line 13 on Form 1120S. That amount does not show up specifically on the Schedule K-1 but, rather, is included in the $91,967 reported at Line 1 on Key’s Schedule K-1 as his share of the company’s ordinary income.
Q: Why does Line 7 in Schedule M-2 not match Line 20 on Keys’ Schedule K-1?
A: The amount recorded at Line 20 on Keys’ Schedule K-1 is Keys’ pro-rata share of total distributions from Information Access, Inc. in 2001. Of the $709,446 total, Keys’ 82% share translated to $581,746 – the amount recorded at Line 20.
Schedule M-2 on Form 1120S captures selected amounts for the whole company. The amount listed at Line 7 in Schedule M-2 reflects the amount of 2001 distributions that came from 2001 operations. In other words, of $709,446 in total distributions, only $37,796 is attributed to 2001 operations.
Q: Deferred revenue - what is it? What does this mean to the income of the company of $112K? Is this a loan or part of A/R?
A: Deferred revenue occurs when a company either a) receives cash for a product or services or b) sends an invoice for a product or service it has not yet delivered to the client. Given GAAP guidance, a company cannot recognize revenue until it has delivered a product or service to a client. Only at that point can it recognize revenue, regardless of whether the client has paid for the product or service.
Information Access, Inc. develops customized software as well as provides maintenance for software it delivers to its clients. Suppose it bills a client for $50,000 of customized software that it will deliver in 60 days. It debits accounts receivable in the amount of $50,000 and credits a liability account on its balance sheet called deferred revenue in the amount of $50,000. Nothing touches the income statement at this point. In 60 days, the company ships the software to the client. At that point, it recognizes $50,000 of revenue by moving the deferred revenue balance of $50,000 to the income statement, i.e., it debits deferred revenue in the amount of $50,000 and credits revenue in the amount of $50,000.
Q: Billings in excess versus cost in excess of billings seems like it’s a play on words – hard to put my mind around this. So we billed $106K over costs, but then our costs are $731K more than billings? So did we overbill or under bill?
A: Billings in excess and cost in excess can apply to several jobs or projects underway at the same time. If a contactor had only one job throughout the year, it could show either costs in excess of billings or billings in excess of cost but not both for a single job.
In this instance, General Contractors had, collectively, billed clients $106,826 in excess of the costs and profits it had incurred on those jobs or projects. At the same time, and with respect to different jobs or projects, General Contractors reported costs and profits as $731,001 less than the invoices it had sent to clients for the work it had completed.
As all jobs come to completion, billings in excess of costs and profits will be eliminated and costs and profits in excess of billings will be eliminated. But while jobs or projects are in process, it is very common to see both billings in excess of costs and profits and costs and profits in excess of billings. From a contractor’s viewpoint, he or she would vastly prefer to bill in excess of cost and profits, since, if the client pays the invoice, that provides cash for the contractor to pay for the project as it unfolds.
Q: Would you go over the bad debt expense and write-off issue again?
A: The bad debt charge-off reported on Statement 13 and listed at Line 6 on Schedule M-1 reflects a total 2001 charge-off that exceeded the bad debt expense on the accrual income statement by $74,680. That implies that the amount of 2001 bad debt expense reported on the accrual income statement (likely buried in the General and Administrative Expense account on the income statement) was $9,998, i.e., the charge-off allowed for income tax purposes of $84,678 less the $74,680 amount that was not recorded on the accrual income statement.
According to the tax regulations, a company may claim as a bad debt expense only the amount it actually charges off in the period and not the amount it estimates as a bad debt expense. In this instance, the actual charge-offs exceeded the bad debt expense estimate by $74,680.
This additional charge-off amount is a definite red flag for the lender. 2001 was the year following the dot.com bust in the spring of 2000. Very likely, Information Access, Inc. was experiencing difficulties among its client base, and this relatively large charge-off compared to the amount recorded on the income statement signals that the company may, indeed, encounter further unexpected problems in collecting receivables from hard pressed clients.
There is a further interesting issue about 2001 charge-offs. The company’s balance sheet reports that the allowance for doubtful accounts fell from $301,999 in 2000 to $139,520. Recall that the allowance is increased by the bad debt expense for the year and then decreased by the amount of charge-offs during the year. Therefore, it appears that Information Access, Inc. added $9,998 to the allowance for doubtful accounts – the amount of the accrual bad debt expense – and then charged off $172,477 to arrive at the 2001 allowance for doubtful accounts balance of $139,520. However, on its business income tax returns, it claims a charge-off of only $84,678, likely reflecting an assessment on the part of the company’s accountants that it could defend only that amount as a truly uncollectible sum. If the remaining $87,799 accrual charge-off – $172,477 – $84,678 – is validated by events in 2002, we would expect to see at least $87,799 reported as bad debt expense on the 2002 Form 1120S.
In any event, the information about accrual bad expense versus accrual and income tax charge-offs suggests Information Access, Inc. may indeed be encountering difficulties in collecting its accounts receivable in the wake of the dom.com bust.
A: The full $250K deduction for 2009 could be used to reduce the amount of profit the Subchapter S corporation owners must report on their personal income tax returns. The Subchapter C corporation, if eligible for a Section 179 deduction, could claim the full amount of the deduction since it is a separate taxpaying entity whose depreciation expense has no impact on the tax position of its owners.
Q: Why doesn't the distribution amount show up on line 7 of Schedule M-2?
A: The accountant provided only partial information on Schedule M-2, beginning with ordinary income, followed by specific adjustments. Line 7 on Schedule M-2 indicates that only $37,796 of the 2001 distributions in the amount of $709,446 were drawn from various elements of 2001 operating income.
Q: On Peter Keys' Schedule B there is a line item for Information Access, Inc for $17,301. I'm assuming this is interest from shareholder loans made to the company. Do you consider this actual income/cash flow for is personal cash flow available to service debt? Also, where does this interest income get reported on the business taxes and or K-1s?
A: The $17,301 does indeed represent interest income to Peter Keys from his loans to Information Access, Inc. We cannot be absolutely certain that it is cash without asking the company or Keys specifically. However, it is highly likely that the amount is cash income to Keys. If he is willing to take $581,746 of cash out of the company as his share of 2001 distributions, it stands to reason that he would have few reservations about taking another $17,301 out of the company in the form of interest income to him from loans that he made, grudgingly perhaps, to the company. Therefore, it seems safe to include this amount in the array of cash inflows that determine the amount of personal cash flow available to service company interest-bearing debt.
With respect to the other side of the transaction, Information Access, Inc. included the $17,301 in its 2001 interest expense total of $141,004 at Line 13 on Form 1120S. That amount does not show up specifically on the Schedule K-1 but, rather, is included in the $91,967 reported at Line 1 on Key’s Schedule K-1 as his share of the company’s ordinary income.
Q: Why does Line 7 in Schedule M-2 not match Line 20 on Keys’ Schedule K-1?
A: The amount recorded at Line 20 on Keys’ Schedule K-1 is Keys’ pro-rata share of total distributions from Information Access, Inc. in 2001. Of the $709,446 total, Keys’ 82% share translated to $581,746 – the amount recorded at Line 20.
Schedule M-2 on Form 1120S captures selected amounts for the whole company. The amount listed at Line 7 in Schedule M-2 reflects the amount of 2001 distributions that came from 2001 operations. In other words, of $709,446 in total distributions, only $37,796 is attributed to 2001 operations.
Q: Deferred revenue - what is it? What does this mean to the income of the company of $112K? Is this a loan or part of A/R?
A: Deferred revenue occurs when a company either a) receives cash for a product or services or b) sends an invoice for a product or service it has not yet delivered to the client. Given GAAP guidance, a company cannot recognize revenue until it has delivered a product or service to a client. Only at that point can it recognize revenue, regardless of whether the client has paid for the product or service.
Information Access, Inc. develops customized software as well as provides maintenance for software it delivers to its clients. Suppose it bills a client for $50,000 of customized software that it will deliver in 60 days. It debits accounts receivable in the amount of $50,000 and credits a liability account on its balance sheet called deferred revenue in the amount of $50,000. Nothing touches the income statement at this point. In 60 days, the company ships the software to the client. At that point, it recognizes $50,000 of revenue by moving the deferred revenue balance of $50,000 to the income statement, i.e., it debits deferred revenue in the amount of $50,000 and credits revenue in the amount of $50,000.
Q: Billings in excess versus cost in excess of billings seems like it’s a play on words – hard to put my mind around this. So we billed $106K over costs, but then our costs are $731K more than billings? So did we overbill or under bill?
A: Billings in excess and cost in excess can apply to several jobs or projects underway at the same time. If a contactor had only one job throughout the year, it could show either costs in excess of billings or billings in excess of cost but not both for a single job.
In this instance, General Contractors had, collectively, billed clients $106,826 in excess of the costs and profits it had incurred on those jobs or projects. At the same time, and with respect to different jobs or projects, General Contractors reported costs and profits as $731,001 less than the invoices it had sent to clients for the work it had completed.
As all jobs come to completion, billings in excess of costs and profits will be eliminated and costs and profits in excess of billings will be eliminated. But while jobs or projects are in process, it is very common to see both billings in excess of costs and profits and costs and profits in excess of billings. From a contractor’s viewpoint, he or she would vastly prefer to bill in excess of cost and profits, since, if the client pays the invoice, that provides cash for the contractor to pay for the project as it unfolds.
Q: Would you go over the bad debt expense and write-off issue again?
A: The bad debt charge-off reported on Statement 13 and listed at Line 6 on Schedule M-1 reflects a total 2001 charge-off that exceeded the bad debt expense on the accrual income statement by $74,680. That implies that the amount of 2001 bad debt expense reported on the accrual income statement (likely buried in the General and Administrative Expense account on the income statement) was $9,998, i.e., the charge-off allowed for income tax purposes of $84,678 less the $74,680 amount that was not recorded on the accrual income statement.
According to the tax regulations, a company may claim as a bad debt expense only the amount it actually charges off in the period and not the amount it estimates as a bad debt expense. In this instance, the actual charge-offs exceeded the bad debt expense estimate by $74,680.
This additional charge-off amount is a definite red flag for the lender. 2001 was the year following the dot.com bust in the spring of 2000. Very likely, Information Access, Inc. was experiencing difficulties among its client base, and this relatively large charge-off compared to the amount recorded on the income statement signals that the company may, indeed, encounter further unexpected problems in collecting receivables from hard pressed clients.
There is a further interesting issue about 2001 charge-offs. The company’s balance sheet reports that the allowance for doubtful accounts fell from $301,999 in 2000 to $139,520. Recall that the allowance is increased by the bad debt expense for the year and then decreased by the amount of charge-offs during the year. Therefore, it appears that Information Access, Inc. added $9,998 to the allowance for doubtful accounts – the amount of the accrual bad debt expense – and then charged off $172,477 to arrive at the 2001 allowance for doubtful accounts balance of $139,520. However, on its business income tax returns, it claims a charge-off of only $84,678, likely reflecting an assessment on the part of the company’s accountants that it could defend only that amount as a truly uncollectible sum. If the remaining $87,799 accrual charge-off – $172,477 – $84,678 – is validated by events in 2002, we would expect to see at least $87,799 reported as bad debt expense on the 2002 Form 1120S.
In any event, the information about accrual bad expense versus accrual and income tax charge-offs suggests Information Access, Inc. may indeed be encountering difficulties in collecting its accounts receivable in the wake of the dom.com bust.