Global cash flow (GCF) and my 'old bus' - a lot in common

I have an old bus affectionately named 'BusBus' (my grand daughter came up with that name when she was three). It's got a lot of miles on it, as do I, and seems to need, and enjoy, a fair measure of 'TLC' which I gladly provide - wax on, wax off. We get along famously.

When I was very young, my brother and I took the city bus home from school each afternoon. Mom would drop us off in the morning and in parting, say, "Take bus 14A, not 14F."  At the bus stop, waiting for 14A, vigilant I was. My younger brother, not so much. Same today.

I didn't know it then, but my anxiety about catching the right bus was needlessly self inflicted. The bus driver on the 14A route was an older gentleman and he had taken it upon himself to make sure we got on the right bus. And, I remember liking him.

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When ratios talk - a conversation with the DSCR (Debt Service Coverage Ratio)

I'm old enough to remember the blackboard at the front of the classroom. Not green, that came much later. Just black. And I recall having to repeatedly write 'I will not ...." until the surface was covered and the nun told me I could stop. This was always done after the other kids had gone home.

The truth can now come out- Sister Mary 'Whatshername' is long gone, and I risk offending no one - I really liked writing on the blackboard. I liked everything about it - the cool slate surface, the feel of the chalk in my hand, and the sound as I wrote, the chalk dust on my uniform shirt sleeve. 

Today, I have an old school blackboard in my office. It's surrounded by a wood frame and has wheels - moveable at one time, but no longer. Got it at a silent auction some years ago. Clients initially ask about it, I respond, and that's the end of it. Some of my long standing clients know the affinity I have for it. They say it goes well with the old fountain pen I favor.

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Global Cash Flow (GCF) - Using the personal tax return to identify related entities

In response to a recent article I wrote about global cash flow, a reader asked, "how can I use the personal tax return to identify possible related entities?"

Good question. Here are my thoughts.

An admission before we get started - I was astounded by how many places within the return related entities were either directly named, or indirectly suggested. I thought I knew - after all, I'm the guy who talks, and listens, to tax returns; the 'tax return whisperer'.

A learning process for me to be sure, and maybe for you as well.

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A conversation with Schedule K-1... who would have guessed?

Recently, I wrote a piece that featured a banker having a conversation with the customer's personal tax return. It was well received; for that I'm grateful.

Here's a conversation with Schedule K-1.

Location: Banker's office, AnyBank, USA

I've just returned from an initial meeting with a new customer and I'm feeling good. I've pursued this customer for some time and late last week he contacted me saying it's time to begin our banking relationship.

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A revealing conversation with a customer's tax return. Interesting, this....

In my seminars, I teach bankers how to extract useful information from the customer's personal and business tax returns. It occurred to me that I've never attempted to describe the process to myself, let alone others. That's about to change.

Truth be told, the tax return talks to me - like the narrator of a good story. Sometimes the story takes the form of a mystery, a drama occasionally. But always alive - moving toward something. Not knowing where it will lead keeps me engaged; the twists and turns of the journey of equal import to the destination. And, I've learned that the tax return is soft spoken, never shouts. I've had to train myself to listen with an educated ear.

Sound ' a little odd'? Maybe, but it works for me. And it may work for you.

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My thoughts about tax reform

Have you noticed the increased prattle about tax reform? It's been hard to miss. Must be political season again. Be that as it may, it got me thinking about tax reform.

To me, reform implies tinkering with something already in place to make it function better. I'm not sure reform is the right concept when directed to our current income tax systems (personal and corporate). Seems too timid. Scrap the current system and start anew appeals to me.

So, let's assume the powers that be have asked me to design this new tax system. Granted, this is not likely anytime soon, but let's pretend. Here are my thoughts.

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What if Congress really does lower the corporate income tax rates?

Lowering the federal corporate tax rate - I suspect a tough sell. But, it could happen within the guise of job creation. I'm not going to comment on the wisdom (or, lack thereof) of such a move. Beyond me to be sure. However, it started me thinking about how some of my clients might react.

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My customer's CPA says the 'optional basis adjustment' was recently made. What is this; what's in it for me?

It's a tax maneuver available to partnerships (including any entity taxed as a partnership). Corporations cannot use it.

It's based on the truism that when you buy an interest in a partnership, you really are buying portion of  the assets, liabilities and equity of the partnership. 

When you buy into a corporation, you are merely buying an interest in the assets, liabilities and equity. Your shares represent that interest; but you don't own the assets, liabilities, and equity. Subtle, but true.

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Can the grantor be the trustee of an irrevocable trust?

A client asked me this question last week. Seems he wants to establish a legal vehicle to provide for the education of his grandchildren and he's heard about the irrevocable trust. I told him straight away I thought the question best put to his attorney, but I wanted to find out for myself. Here's what I uncovered.

The short answer is yes, but it's generally perceived as unwise.

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Everything you always wanted to know about Schedule E, Form 1040 (Part 2 Pass Through Entities)

Let's talk about Schedule E, Page 2.

First, the name of the 'pass through' entity is listed, along with the legal format (i.e. partnership, S corporation, etc.). Partnerships and S corporations are identified using 'P', 'S' respectively. Multiple member limited liability companies almost always choose to be taxed as partnerships, so they will use the 'P' designation.

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Everything you always wanted to know about Schedule E, Form 1040 (Part 1 Rental Real Estate, Royalties)

Many bankers tell me Schedule E can be daunting; difficult to work with. Understood. Let's see if I can simplify it for you.

First, Schedule E has two, very distinct parts.

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How does an ILIT (Irrevocable Life Insurance Trust) work?

This is the stuff of estate planning for the well off.

When a person dies, their estate is created subject to the federal (and in most instances State) estate tax. The value of all assets owned by the decedent at death (including assets held in the name of a revocable trust) is determined. This amount is called the 'gross estate'. It's the starting point used for calculating the estate tax.

Consider life insurance proceeds - is the amount included in the gross estate? Maybe.

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I'm confused - just how is a limited liability company taxed for federal purposes?

I'm asked this question a lot. I suspect it's because there are many possibilities.

When thinking about a limited liability company (LLC), find out if it's owned by:

• One natural person (one, single owner),
• Husband and wife (husband-wife qualified joint venture organized as an LLC), or
• Multiple persons (multiple member LLC).

Why? The taxation options available the LLC are linked to the ownership.

Some LLCs must be taxed as corporations - they simply have no choice. These are few; you are unlikely to run across any.

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'Global cash flow' - hum...

In my seminars, I often hear bankers use the term 'global' cash flow. And, it's often used as though everyone in the room knows the definition. Alas, I'm 'the odd man out'.

Is there a universal definition? I think not.

Let's discuss the concept of 'global' cash flow. Maybe we can establish some acceptable, shared understanding of the concept and its practical application.

Not long ago, a student offered his definition of global cash flow - "it's what I use when the actual cash flow of the borrower comes up short. and I need to salvage the deal." Swell.

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Is it a good idea own appreciating depreciable real estate in a closely held corporation? I think not....

There are many, and varied reasons for not owning appreciating depreciable real estate in a closely held corporation. Some reasons are purely tax based, others having a good measure of economic substance.

Some of you might question my focus on 'appreciating depreciable real estate'; in many parts of the country real estate is doing everything but. Some might even suggest the days of appreciating real estate are long gone. I don't think so. At some future point, demand will exceed supply, lenders will find it in their best interest to lend. The cycle will start anew.

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