ANALYZING TAX RETURNS STEPHEN FURR, CPA

ADVANTAGES OF TAX RETURNS OFTEN THE MOST OBJECTIVE DATA AVAILABLE –ANNUAL REQUIREMENT AT FEDERAL & STATE –OFTEN PROFESSIONALLY PREPARED BY CERTIFIED PROFESSIONALS –DATA IS ALREADY SUMMARIZED AND OFTEN RECONCILED IN PREPARATION –TRENDS OVER TIME

DISADVANTAGES OF TAX RETURNS MULTIPLE FORMS USED MULTI-PAGES ON EACH FORM COMPLICATED COMPUTATIONS SCHEDULES AND WORKSHEETS GAINS, LOSSES, DEPRECIATION, DISTRIBUTIONS, DRAWS, EQUITY, K-1, SCHEDULE A, B, C TIME CONSUMING TO ANALYZE MULTIPLE YEARS

MOST COMMON FED BUSINESS RETURNS SOLE PROPRIETORS –SCHEDULE C FORM 1040 SINGLE MEMBER, LLC –SCHEDULE C FORM 1040 PARTNERSHIPS & MULTI-MEMBER LLC –FORM 1065 SUB-CHAPTER S CORPORATIONS –FORM 1120S

1065 & 1120 S INCOME PASSES THROUGH THE RETURN TO THE FORM 1040 PERSONAL RETURN PASS THROUGH MADE VIA SCHEDULE K-1 BOOK AND TAX INCOME NOT ALWAYS THE SAME AND SHOULD (NOT ALWAYS REQUIRED) BE RECONCILED

1065 & 1120S ITEMS REQUIRING RECONCILIATION –INTEREST, DIVIDEND, AND OTHER INVESTMENT INCOME NOT COMPUTED IN TAX INCOME (Pass through). –NOT ALL EXPENSES ARE DEDUCTIBLE MEALS AND ENTERTAINMENT (50%) CHARITABLE CONTRIBUTIONS (Pass through) SECTION 179 DEPRECIATION (Pass through)

1065 & 1120S OTHER ISSUES –DRAWS AND DISTRIBUTIONS- NOT EXPENSES BUT EQUITY TRANSACTIONS AFFECTING CASH FLOW –LOANS TO/FROM SHAREHOLDERS- NEITHER INCOME/EXPENSE BUT ASSET/LIABILITY TRANSACTIONS AFFECTING CASH FLOW

SITUATION MULTIPLE YEARS OF TAX FORMS TO EXAMINE DIFFERENT TYPES OF FORMS ALLEGED CHANGE IN BUSINESS STRUCTURE AND OWNERSHIP

THE DATA BALANCE SHEET Schedule L INCOME SCHEDULE K-1

Income Expense Data as Percentage of Sales Significant trends –Gross Profit up over 5% –Expenses up almost 13% –Net Income down 8%

Income & Expense Net Change Sales Increase 10% COGS Decrease 2% Gross Profit Increase 21% Expenses Increase 45% Net Income Decrease 54%

Balance Sheet Analysis Critical to Analyzing Cash Flow From Schedule L of Form 1065 and 1120S Begin by Computing Annual Changes in Assets Liabilities and Equity The Accounting Equation –Assets = Liabilities + Equity Increases in Assets are deemed reductions in Cash Increases in Liabilities are deemed increases in Cash Changes in Equity should reflect Net Income Remember Non- Deductible Expenses

STATEMENT OF CASH FLOWS Cash Flow Does not add up Problem appears to be with 2009 Change in Structure

Further Things to Research 2009 Dissolution of Partnership –Check for Affidavit of Dissolution with Sec State Creation of 1120S Corporation –Check with Sec State for Charter –Ask for copy of IRS Form Application –Ask for Copy of IRS Letter approving S Corp Status Check for verification of Advertising Expense- no discernible positive impact on sales Check for Agreement by Partner 2 to Partner 1 receiving distribution on dissolution Verify salaries and wages expense