Personal Income Tax Returns and Cash Flow (Session #4)
Q: How do you know the transaction reported at Line 8a was a personal sale and not business related?
A: Form 1099-B noted at Line 8a on Schedule D refers to gain or loss information provided by a broker directly to a client. Therefore, we conclude that McPherson reported the amounts at Line 8a based on Form 1099-B information provided him by his broker for his personal investments.
Q: On Poll Question 6, I thought you stated the checking account was to cover personal expenses? Therefore shouldn’t the correct answer be a) ready cash plus the checking account balance less b) personal debt obligations? The checking account would cover the personal living expenses.
A: Typically cash in checking accounts would be used up immediately. Therefore, it is excluded in the calculation of ready cash available to meet business and personal obligations. For example, McPherson reports a checking account balance of $17,507, which he would use up quickly if his cash revenue sources were cut off or diminished greatly. As a result, ready cash, which includes all liquid assets except for the checking account, must be sufficient to meet estimated living expenses, taxes, and personal debt service for an extended period of time.
Course overview: Personal Income Tax Returns and Cash Flow