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Tax Return Analysis

Do I use self-employment earnings from the 1065 K-1?

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.

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About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.