Q: If I understand you correctly, do taxpayers have to file the preliminary tax return with the extension? Or it is just available and with the preparer?
A: If taxpayers place their returns on extension, they must file a form which includes an approximation of the income tax liability. They may submit, as well, an estimated income tax payment to bring them current for the tax year, which will subsequently be adjusted when the final returns are prepared and submitted.
There is a considerable incentive for the taxpayer to correctly estimate his or her income tax obligation and pay accordingly at the time of the extension. The federal government charges taxpayers with returns on extension 1.5% per month on the unpaid balance. However, if a taxpayer’s income tax withholding, estimated income taxes paid during the year, and any additional payment made at the point of the extension are 90% or more of the final obligation, then the 1.5% charge is waived. States, in turn, apply their own individual penalties to underpayment of income taxes for those returns on extension.
At the time of the extension, virtually all of the relevant income tax information exists to file a completed return. The W-2s are usually distributed by February 1. The 1099s must be distributed by March 1. Pro-rata share of income and expenses in non-subchapter C corporations may not be final but the broad outlines are available, since companies will certainly know there taxable income by April 15th. In other words, even if a personal income tax return is on extension, the important elements and amounts for that return are generally available but you must ask for them.
Q: Are you going to talk about the $4,112,432 contribution reported on Mr. Schumacher's K-1 from Sequoia Properties?
A: The $4,112,432 contribution listed on Schumacher’s K-1 (Form 1065) from Sequoia Properties is a non-cash contribution that reflects the reclassification of $4,112,432 in loans from Schumacher to Sequoia Properties to equity, i.e., a capital contribution. The key point is that it is a non-cash contribution. We only know that by working through the UCA cash flow statement in Session 2 and, in so doing, using information in Footnote 4 to the company’s financial statement. Had that information not been available, we would have erroneously concluded that the $4,112, 432 was, indeed, a cash contribution in 2007.
Q: The K-1 for Sequoia Properties shows capital contributions of $4,112,432. Should this be deducted from personal cash flow?
A: Since the contribution was a non-cash contribution, we need not make a deduction of any nature. However, if it were a cash contribution, it would not fall within the range of activities we consider in compiling the personal cash flow statement - cash revenue, cash living expenses, cash taxes, and cash debt service. It is an investment activity, which we do not address in the personal cash flow statement since, in effect, we work down through Cash after Debt Repayment (using UCA cash flow terminology) and go no further because of data problems, e.g., lack of historical cost information for asset acquisition.
Q: Can you go over again why the distribution - $86,346 - from Sequoia Properties was backed out, whereas the Subchapter S income - $2,263,006 - was not?
A: The intent was to determine the impact on Fritz Schumacher’s personal cash flow if Sequoia Properties ran into financial and cash flow problems and was compelled to terminate all cash outflows to the owner. The only outflow we identified was the distribution of $86,346 from Sequoia Properties to Schumacher. There was no salary and no loans to the owner.
The $2,263,006 in cash from the Subchapter S corporations would be untouched, given the nature of the exercise. That amount of cash inflow to Schumacher came from Clovis Supply and Modesto Services only. None of that amount came from Sequoia Properties. Consequently, there was no need to make any adjustment to the $3,263,006 cash flow from the two Subchapter S corporations to Schumacher.
Q: How does Luis Castillo play into the global cash flow?
A: It’s very unclear. We don’t have any personal income tax information for him. If we had his Schedule K-1 from Sequoia Properties, we could determine if he guaranteed any company debt by virtue of the partnership agreement. If he were compelled to do so, we would see amounts listed at qualified non-recourse and, perhaps, at recourse financing. If so, then we would definitely want full information about him and his personal financial situation.
Since he is also a 50% owner of Fresno Properties, we would like to see the same information via the Schedule K-1 from that company.
From comments and information available, it seems as if Schumacher has the financial resources and ability to raise money while Castillo possesses the operational or managerial talent. Schumacher puts money into the companies and takes it out of the companies in the form of distributions and loans. All the distributions flow to Schumacher. All the loans go to Schumacher. Castillo must be rewarded in other ways, which would only become apparent from personal income tax and personal financial statement information.
A: If taxpayers place their returns on extension, they must file a form which includes an approximation of the income tax liability. They may submit, as well, an estimated income tax payment to bring them current for the tax year, which will subsequently be adjusted when the final returns are prepared and submitted.
There is a considerable incentive for the taxpayer to correctly estimate his or her income tax obligation and pay accordingly at the time of the extension. The federal government charges taxpayers with returns on extension 1.5% per month on the unpaid balance. However, if a taxpayer’s income tax withholding, estimated income taxes paid during the year, and any additional payment made at the point of the extension are 90% or more of the final obligation, then the 1.5% charge is waived. States, in turn, apply their own individual penalties to underpayment of income taxes for those returns on extension.
At the time of the extension, virtually all of the relevant income tax information exists to file a completed return. The W-2s are usually distributed by February 1. The 1099s must be distributed by March 1. Pro-rata share of income and expenses in non-subchapter C corporations may not be final but the broad outlines are available, since companies will certainly know there taxable income by April 15th. In other words, even if a personal income tax return is on extension, the important elements and amounts for that return are generally available but you must ask for them.
Q: Are you going to talk about the $4,112,432 contribution reported on Mr. Schumacher's K-1 from Sequoia Properties?
A: The $4,112,432 contribution listed on Schumacher’s K-1 (Form 1065) from Sequoia Properties is a non-cash contribution that reflects the reclassification of $4,112,432 in loans from Schumacher to Sequoia Properties to equity, i.e., a capital contribution. The key point is that it is a non-cash contribution. We only know that by working through the UCA cash flow statement in Session 2 and, in so doing, using information in Footnote 4 to the company’s financial statement. Had that information not been available, we would have erroneously concluded that the $4,112, 432 was, indeed, a cash contribution in 2007.
Q: The K-1 for Sequoia Properties shows capital contributions of $4,112,432. Should this be deducted from personal cash flow?
A: Since the contribution was a non-cash contribution, we need not make a deduction of any nature. However, if it were a cash contribution, it would not fall within the range of activities we consider in compiling the personal cash flow statement - cash revenue, cash living expenses, cash taxes, and cash debt service. It is an investment activity, which we do not address in the personal cash flow statement since, in effect, we work down through Cash after Debt Repayment (using UCA cash flow terminology) and go no further because of data problems, e.g., lack of historical cost information for asset acquisition.
Q: Can you go over again why the distribution - $86,346 - from Sequoia Properties was backed out, whereas the Subchapter S income - $2,263,006 - was not?
A: The intent was to determine the impact on Fritz Schumacher’s personal cash flow if Sequoia Properties ran into financial and cash flow problems and was compelled to terminate all cash outflows to the owner. The only outflow we identified was the distribution of $86,346 from Sequoia Properties to Schumacher. There was no salary and no loans to the owner.
The $2,263,006 in cash from the Subchapter S corporations would be untouched, given the nature of the exercise. That amount of cash inflow to Schumacher came from Clovis Supply and Modesto Services only. None of that amount came from Sequoia Properties. Consequently, there was no need to make any adjustment to the $3,263,006 cash flow from the two Subchapter S corporations to Schumacher.
Q: How does Luis Castillo play into the global cash flow?
A: It’s very unclear. We don’t have any personal income tax information for him. If we had his Schedule K-1 from Sequoia Properties, we could determine if he guaranteed any company debt by virtue of the partnership agreement. If he were compelled to do so, we would see amounts listed at qualified non-recourse and, perhaps, at recourse financing. If so, then we would definitely want full information about him and his personal financial situation.
Since he is also a 50% owner of Fresno Properties, we would like to see the same information via the Schedule K-1 from that company.
From comments and information available, it seems as if Schumacher has the financial resources and ability to raise money while Castillo possesses the operational or managerial talent. Schumacher puts money into the companies and takes it out of the companies in the form of distributions and loans. All the distributions flow to Schumacher. All the loans go to Schumacher. Castillo must be rewarded in other ways, which would only become apparent from personal income tax and personal financial statement information.