Pam Asks:
Unlike the 1065 K-1 for partnerships and LLC’s, I find that many 1120S K-1’s do not include the shareholder’s equity which reports contributions and distributions with the shareholder. Distributions are reported on another line, but contributions from the shareholder to the company are not reported. I request the Shareholder Basis Worksheet, but many borrowers are unfamiliar with this worksheet. Do you have any advice on how to obtain the contribution information for an S Corp?.
Linda says:
Pam, you have discovered one of several differences between 1065 K-1s and 1120S K-1s. There is no place in the 1120S tax return where capital contributed by an individual owner is listed. Here are a couple of indicators of cash ‘contributed’ into the company from the shareholder but only work if you have the entire return and a balance sheet is required.
You need the full return.
The K-1 will never tell you what an s corporation shareholder contributed. In fact, there is no place in the return that you can tell what one shareholder contributed. But you can see what the shareholders combined have been putting in.
You need the Balance Sheet
The balance sheet is not required if the company assets and receipts for the year are under $250,000. (This rule varies somewhat but applies to 1065, 1120 and 1120S. See the Schedule B: Other Information schedule in the respective return for the criteria. In the 2021 1120S it is Item 11.)
If it is not required, and you are lending to this company, my guess is you have client- or CPA-prepared financials and you can look at the Balance Sheet in those financial statements for similar information.
Three places to look
These three lines will show you if one or more shareholders are putting cash into the company. You will not know which shareholder, though, without asking.
- Decrease in Line 7 Loans to Shareholders. (One or more shareholders are paying back one or more loans.)
- Increase in Line 23 Additional Paid-in-Capital (This could be one or more shareholders adding more or a new shareholder buying in.)
- Increase in Line 19 Loans from Shareholders. (One or more shareholder are lending money to the company.)
What else to ask for
Your request for the Shareholder’s Basis Worksheet makes sense and since it is not a formal part of the return, I am not surprised your borrower will not be familiar. They can get it from their CPA if need be. The tax preparer is definitely tracking this.
Why the IRS is not consistent between the 1065 K-1 and the 1120S K-1
Because they do not have to be. Okay, that is a bit flippant. But remember the IRS is creating these forms solely for their needs, to determine taxable income and tax due. If there is something that is helpful to us as lenders but not relevant to the IRS, they are unlikely to include it. That is why learning about one IRS form or even a particular line on that form does not always allow us to extrapolate to another form or line. That is why I am here for you.
