Q: If the capital loss were long-term, you'd still consider the cash received even though it may have been a loss because it's been held for over a year. In other words, based on looking at Schumacher's tax return, we'd report $153,990 as a cash inflow and a $3,000 long-term loss on the personal income tax returns. Is this correct?

To take this question one step further, even if the capital loss is short-term, but the purchase was in, let's say, December 2013 and the sale was in early 2014, could we consider the true cash inflow even though the transaction created a loss? In other words, I understand a short-term loss is assumed the cash inflow and outflow happen in the same period, but in my example it's not. It appears like the timing of the short-term capital transaction could have an impact on what number is used for the true cash used in a cash flow analysis.

A: You are correct.

We identify cash inflows and outflows in 2014 regardless of whether they are associated with a short or long-term gain for income tax purposes. If the cash outflow to purchase the asset in this instance occurred in 2013, we would then record a $153,990 cash inflow for capital gains in 2014. But, as we have it here, we recorded the difference between the cash outflow to purchase the asset in 2014 – $250,000 – and the cash proceeds from the sale of the asset in 2014 – $153,990. The difference is our $96,010 cash outflow in 2014 associated with the capital gains category on the personal cash flow statement.

Q: Can you review one more time how to determine distributions to owners in the absence of Schedule K-1 statements?

A: There are a couple of ways of doing so. First, look for a Statement of Shareholders' Equity or Partnership Capital in the accrual financial statements. If the financial package includes such a statement, it will report distributions for the year. Second, look for a Statement of Cash Flows in the financial package. If one exists, it will report distribution in the Financing Activities section of the statement.

And as a third option, add this year's reported net income to last year's retained earnings. The sum of these two amounts will be equal to this year's retained earnings, unless the company made distributions. If it did so, this year's retained earnings will be less than the sum of a) last year's retained earnings and b) this year's net income by the amount of the distributions.

Q: What did the client do with the proceeds from the capital asset sale?  If the client put the gains back into the market, then there is no cash impact.

A: We are calculating the cash flow to an individual during the 2014 tax year. After determining the net cash flow (i.e. after living expenses, tax and loan expenses) for the year, then the operative question becomes how the surplus cash flow was used?

We may never fully reconcile how all the surplus cash was used. However, to determine the amount of cash that a guarantor is able to put back into the business, we must look for the liquid assets on a currently signed and dated personal financial statement.

The take away is that it is not the surplus cash flow that is important to the strength of the personal guaranty for emergency financing, but rather the actual cash amount the guarantor has at a given time backed by broker statements, if necessary.