Bill asks:
On the managing member’s 1065 Schedule K-1 for an LLC, Box 14 “Self-employment earnings (loss)” is $9,862,741 with a code letter of “C”. Is this actual cash flow to the managing member or should I just ignore it.
Linda says:
Ignore it. It is typically the combination of Line 1 Ordinary Income plus Line 4 Guaranteed Payments if the partner is active in the business, rather than an investor.
What to use instead
The cashflow from a 1065 K-1 is withdrawals/ distributions plus guaranteed payments less capital contributed.
Mortgage lenders using FannieMae or similar rules have a different calculation.
Do I have to count capital contributions against the owner/guarantor’s cash flow?
We sometimes do not count capital contributions against cash flow if it is clearly one-time. This might be the case of the LLC members all put money in to make a significant capital purchase or pay down debt.
You would need the full return with a Schedule L Balance Sheet to spot that. But if you have three year’s k-1s and there is capital contributed in only one of the three that might be your clue to look closer.
Get free video training on K-1s
When I speak at risk management conferences I am always delighted when someone comes up, introduces themselves, and let’s me know how helpful this k-1 video series is. I like to think of it as ‘drip method’ training.
Keep the check in the box for Ask Linda and you will also get an email whenever I post the answer to a tax return analysis question. We never share your email addresses and everything has an easy opt-out.
