Michael asks:
My question is about 1065, K-1, Part III section 4 Guaranteed Payments. In Lender’s Online Training you taught us that guaranteed payments are cash flow, and that we should reframe the word ‘guaranteed’ to ‘agreed upon’ payments since if the company does not have sufficient operating cash flow to pay them, they probably are not actually guaranteed. Do these payments show up anywhere on the individual’s tax returns?
Linda says:
The quick answer is yes. But it is not obvious. There is no place in the 1040 where it indicates that ‘Guaranteed payments’ should be listed.
Hidden on Schedule E
1040 Schedule E Part II is ‘Income or Loss from Partnerships and S Corporations’ and is on page two of the schedule. Guaranteed payments are combined with Ordinary Income (from Line 1 of the K-1) and reported either as passive income/loss if the owner is more like an investor, or nonpassive income/loss if the owner is active in the business.
How can guaranteed payments ‘turn into’ a loss?
They don’t. But if the ordinary loss is greater than guaranteed payments, the combination can be a loss.
When can you use 1040 Schedule E, Part II for cash flow, since guaranteed payments are cash flow?
Never, because the guaranteed payments which are cash flow are combined with ordinary income which is not. The tried-and-true method of determining actual cash flow to an owner from a 1065-filing entity (partnership or multi-owner LLC) is to obtain the K-1s.
Need More help on K-1s?
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