Q: When calculating an entity's cash flow, should COGS depreciation be included in the depreciation that is added back?
A: First of all, please remember that net income plus depreciation is not cash flow, unless we are looking at an entity that has no balance sheet. We use net income plus depreciation and amortization as the starting point on the Cash Flow Snapshot Worksheet to calculate a quick estimate of cash flow from business operations, which we term Business Cash Income.
All depreciation and amortization is added back to the net profit in this calculation. Depreciation may be included as part of Cost of Goods Sold or as part of Operating Expenses or allocated between Cost of Goods Sold and Operating Expenses.
We then deduct distributions and loans to owners, and then we track movements in cash through the operating asset accounts and operating liability accounts from period to period to arrive at an estimate of Business Cash Income.
Q: It seems that the IRS is going to collect income tax on company profit from either the company or the owners. Is that right? So if the company is an S Corp, we don't see the tax obligation on the income statement but it really does exist?
A: Yes. You are absolutely correct. The IRS collects taxes on the company profit one way or another. Subchapter C corporations are responsible for the taxes on the profit they generate so the IRS collects tax directly from the C Corporation.
Subchapter S corporations, partnerships, limited liability companies and sole proprietorships are called pass-through entities because the profits or losses are passed to the owners. That is,even though we don’t see taxes on the financial statements of these non-Subchapter C organizations, the owners must report their pro-rata share of the profits to the IRS and pay taxes on their share of the profits.
The owners of an Subchapter S corporation, a partnership, or an LLC report their share of the profits on Schedule E of their income tax return. A sole proprietor reports that income on Schedule C. The owners, not the company, pay the taxes and they pay those taxes at the personal income tax rate. For example, if an individual is in the 35% tax bracket, he or she is going to pay 35% of his or her share of the profit to the federal government. And of course, the owners also pay the state taxes on their pro-rata share of the company profit.
Q: When/how are tax percentages divided among owner/s?
A: The owner pays taxes on his or her pro-rata share of the profit of a non-Subchapter C corporation, i.e., a Subchapter S corporation, a Partnership or a Limited Liability company. For example, if the pro-rata share for an owner is 80%, that owner will report 80% of the company profit on Schedule E of his or her tax return and pay taxes on 80% of the company profit. A sole proprietorship has, by definition, one single owner and so that single owner reports 100% of the profit on Schedule C and pays taxes on 100% of the profit.
A: First of all, please remember that net income plus depreciation is not cash flow, unless we are looking at an entity that has no balance sheet. We use net income plus depreciation and amortization as the starting point on the Cash Flow Snapshot Worksheet to calculate a quick estimate of cash flow from business operations, which we term Business Cash Income.
All depreciation and amortization is added back to the net profit in this calculation. Depreciation may be included as part of Cost of Goods Sold or as part of Operating Expenses or allocated between Cost of Goods Sold and Operating Expenses.
We then deduct distributions and loans to owners, and then we track movements in cash through the operating asset accounts and operating liability accounts from period to period to arrive at an estimate of Business Cash Income.
Q: It seems that the IRS is going to collect income tax on company profit from either the company or the owners. Is that right? So if the company is an S Corp, we don't see the tax obligation on the income statement but it really does exist?
A: Yes. You are absolutely correct. The IRS collects taxes on the company profit one way or another. Subchapter C corporations are responsible for the taxes on the profit they generate so the IRS collects tax directly from the C Corporation.
Subchapter S corporations, partnerships, limited liability companies and sole proprietorships are called pass-through entities because the profits or losses are passed to the owners. That is,even though we don’t see taxes on the financial statements of these non-Subchapter C organizations, the owners must report their pro-rata share of the profits to the IRS and pay taxes on their share of the profits.
The owners of an Subchapter S corporation, a partnership, or an LLC report their share of the profits on Schedule E of their income tax return. A sole proprietor reports that income on Schedule C. The owners, not the company, pay the taxes and they pay those taxes at the personal income tax rate. For example, if an individual is in the 35% tax bracket, he or she is going to pay 35% of his or her share of the profit to the federal government. And of course, the owners also pay the state taxes on their pro-rata share of the company profit.
Q: When/how are tax percentages divided among owner/s?
A: The owner pays taxes on his or her pro-rata share of the profit of a non-Subchapter C corporation, i.e., a Subchapter S corporation, a Partnership or a Limited Liability company. For example, if the pro-rata share for an owner is 80%, that owner will report 80% of the company profit on Schedule E of his or her tax return and pay taxes on 80% of the company profit. A sole proprietorship has, by definition, one single owner and so that single owner reports 100% of the profit on Schedule C and pays taxes on 100% of the profit.