1065 K-1 Withdrawals Do Not Match Distributions

Danielle’s Question:

I attended your Manager Briefing – Clearing up K-1 Confusion (access the video here). I have a question regarding a recent K-1 I received.

From the 1065 K-1: Item L Withdrawals and Distributions was $30,000. On the same K-1, Box 19 A was $22,500

There were no other codes listed in box 19 and full business tax returns were not provided. Should I assume that the difference ($7,500) was property distributions or might there be another explanation of the difference?

Linda’s Answer: 

Thanks for your K-1 question, Danielle. My favorite type of question!

The facts:

• Your borrower showed $30,000 on 1065 K-1 Box L Withdrawals and Distributions and only $22,500 on Line 19 with a code of A. 
• They did not have other Line 19 amounts.
• If the remaining $7,500 had been property distributions, they should have been shown on Line 19 but with a code of C.

Some assumptions as to ownership percentage

I am assuming you have an owner with less than 25% ownership which is why you are comfortable with just the K-1 and not the entity return. If so, you should have at least two if not three year’s K-1s. Is the $22,500 consistent with the other years? Or the $30,000?

When distributions exceed basis

One explanation for distributions on Line 19 being less than withdrawals and distributions in Box L is if the distributions exceed the partner’s basis in the partnership. In that case, the excess distributions are not a distribution of previously taxed income,but rather a capital gain. 

If it is cash, if the partner is an individual, you should see a 1040 Schedule D entry for the capital gains. 

If the excess distribution is cash, you may not see the result in the 1040 until the partner, who  now owns the property if it was distributed to them, sells it.

Next steps

1. Do you see a Schedule D entry related to the $7,500?
2. Does using the $22,500 distributions provide enough personal cashflow to make your loan work?
3. Is the $22,500 consistent with distributions in the previous or subsequent years?

I would feel free to ask the borrower about the difference, especially if the difference makes a difference in your loan decision. Even if you see the missing $7,500 on Schedule D, I would wonder about an owner taking distributions that are not supported by earnings.

But then, I would remember that the cashflow may be available because of significant depreciation or other noncash expenses. There is nothing wrong with an owner taking home cashflow available from the company if the liquidity is not compromised.

More on 1065 K-1s:

For more on K-1s for calculating actual cashflow to an owner, available cashflow to an owner or whether the cashflow kept in the company and not paid to an owner is sufficient to cover company debt payments, check out the three modules on 1065 tax returns in Lenders Online Training.