Personal Income Tax Returns Webcast
Personal Income Tax Returns Exercise
As preparation for the webcast, please complete the following:


Read the Credit Refresher on Personal Cash Revenue.
Review the personal financial statements and excerpts from the personal income
tax returns for Douglas McPherson.
Then complete as many of the steps in the exercise as time permits prior to the webcast.
Exercise Steps
1. Review Lines 7 through 22 on McPherson's 2015 Form 1040 and determine whether
the total at Line 22 includes all cash income recorded on Lines 7 through 21 in this
section of the 1040.
2. Review Schedule A from McPherson's 2015 personal income tax returns. Identify
investments or assets owned by McPherson that are implied by amounts listed on
Schedule A.
3. Review Schedule B from McPherson’s 2015 personal income tax returns. Determine
whether any of the amounts listed in Part I or Part II is non-cash.
4. Review Schedule D from McPherson’s 2015 personal income tax returns. Determine
the amount of cash provided in 2015 by long-term capital gains.
5. Review Part I on Schedule E from McPherson's 2015 personal income tax returns.
Determine the amount of cash income from rental properties available to service
mortgage interest on those properties.
6. Review Schedule K-1 (Form 1120S) attached to McPherson’s 2015 personal income
tax returns along with the 2015 financial statements for Sandover Contractors.

Identify where the amounts listed at Lines 1, 11, and 16 in Part III appear on
McPherson’s 2015 personal income tax returns.

Determine the amount of cash that Sandover Contractors provided McPherson in
2015 – including 2015 loans to McPherson as well as partial repayment of loans
from him to the company – and compare that amount with the total amount of
Sandover Contractors’ revenue reported by McPherson on his 2015 personal
income tax returns.
7. Review Schedule K-1 (Form 1065) attached to McPherson’s 2015 personal income
tax returns.
Copyright 2002 – 2016 by Rex Beach & Associates and Shockproof! Training
Personal Income Tax Returns Webcast

Identify where the amounts listed at Lines 1, 2, 5, 9a, and 19 in Part III appear on
McPherson’s 2015 personal income tax returns.

Determine the amount of cash that Greater Pacific Realty Partners provided
McPherson in 2015 and compare that amount with the total amount of Greater
Pacific Realty Partners’ revenue reported by McPherson on his 2015 personal
income tax returns.

Determine whether information at Line K in Part II has implications for
McPherson’s ability to provide support for Sandover Contractors’ interest-bearing
debt.
8. Using McPherson's 2015 income tax returns, personal financial statements, and the
2015 financial statements for Sandover Contractors, Inc., estimate his personal cash
flow available to service outside interest-bearing debt in 2015. Use the attached
worksheet to assist you.

Remove all interest expense amounts from taxable income recorded on the
supporting schedules and then on Form 1040, e.g., interest expense recorded in
Part I on Schedule E.

Remove all non-cash charges or non-cash expenses from taxable income recorded
on the supporting schedules and then on Form 1040, e.g., depreciation expense
recorded in Part I on Schedule E.

Do not include cash taxes or debt service with personal expenses. Cash taxes and
debt service are captured in separate sections on the worksheet.

Assume that McPherson reported income tax due of $79,434 at Line 78 on his
2014 Form 1040 and made all 2014 and 2015 estimated federal tax payments in
their respective years.

Assume debt service on credit card debt was approximately 3% per month of the
unpaid balance.

Per Line 14 on Schedule A, note that interest expense on McPherson's notes and
advances payable to Sandover Contractors, Inc. was $2,750.

Refer to the worksheet footnotes for guidance about several entries.
9. Remove all sources of cash from McPherson's 2015 personal cash flow statement
associated with Sandover Contractors, Inc. and estimate the resulting amount of cash
available to service debt in 2015. Assume personal living expenses remained
unchanged. Assume cash taxes are 25% of adjusted cash revenue.
10. By reference to McPherson's personal financial statements, determine the amount of
financial support he could readily provide within five business days to Sandover
Contractors, Inc. should the company encounter cash flow difficulties in servicing its
debt.
As a point of information, debt service in the year 2016 is $187,097, apart from
scheduled debt repayment of $86,863 for subordinated debt
Copyright 2002 – 2016 by Rex Beach & Associates and Shockproof! Training
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Personal Income Tax Returns Webcast
Personal Cash Flow Worksheet – Douglas McPherson
Revenue
1040
Cash
1040
Cash
Line 7 – Wages and Salaries
Line 8a – Taxable Interest
Line 8b – Tax Exempt Interest
Line 9 – Ordinary Dividends
Line 13 – Capital Gains1
Line 17 – Schedule E Income/Rental Income
Line 17 – Schedule E Income/Partnership2
Line 17 – Schedule E Income/Subchapter S corporation3
Equals: Total Revenue
Living Expenses
Living Expenses
Insurance Expenses
Alimony Expenses
Medical Expenses
Other Expenses
Equals: Living Expenses
1
If sufficient information exists, include the actual cash inflow from the transactions that resulted in capital
gains or losses, such as the sales price of the assets received in cash in 2015 less any cash outlays to
purchase the assets in 2015. If such information does not exist, use the cash amount of capital gains
rather than the net cash proceeds from the sale of assets. Keep in mind that the cash amount of capital
gains, regardless of how computed, is generally considered a one-time event rather than a recurring event.
Consequently, cash capital gains is generally excluded from the personal cash flow statement in
estimating future, and recurring, personal cash flow.
2
If information exists, include loans from the partnership to the owner and loan repayments by the
partnership to the owner.
3
If information exists, include loans from the Subchapter S corporation to the owner and loan repayments
by the company to the owner.
Copyright 2002 – 2016 by Rex Beach & Associates and Shockproof! Training
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Personal Income Tax Returns Webcast
Taxes
1040
Cash
State and Local Taxes per Schedule A/Statement 4
Real Estate Taxes per Schedule A
Personal Property Taxes per Schedule A
FICA Taxes per Statement 3
Medicare per Statement 3
Prior Year Amount Owed – Line 78 Form 1040 (2014)
Federal Withholding – Line 64 Form 1040/Statement 3
2015 Estimated Payments – Line 65 Form 1040
Equals: Estimated Taxes
Summation
Cash
Cash Revenue
Cash Living Expenses
Estimated Cash Taxes
Cash Available to Service Personal Debt
Personal Debt Service
Cash
Revolving Debt
North American Mortgage Payments
Ventura Savings Mortgage Payments
Note Payable – Sandover Contractors, Inc.
Advances – Sandover Contractors, Inc.
Equals: Personal Debt Service
Summation
Cash
Cash Available to Service Debt
Personal Debt Service
Cash Surplus/Deficit after Personal Debt Service
Copyright 2002 – 2016 by Rex Beach & Associates and Shockproof! Training
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