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'Self-employment earnings' from 1065 K-1

Your question:

Can I use the ‘Self-employment earnings (loss)’ on Line 14 (A) of the 1065 K-1 as cash flow?

Linda says:

Wouldn’t that be great!?! However, if you do, you are likely double-counting income/cash flow.

What it is:

Find the 1065 K-1 in my Partnership/Corporation Tax Returns manual. If you do not have my manual, go to IRS.gov and download the PDF for Form 1065 K-1.

Sample:

Line 1 Ordinary business income $32,980
Line 4 Guaranteed payments 30,000

Line 14a Self-employment earnings will be $62,980

The taxpayer has to pay SE tax (Social Security) on the combination of his share of taxable (ordinary) income and the guaranteed payments he received.

The Self-employment figure is there so that the 1040 preparer can put the correct number on the 1040 SE and the taxpayer can pay the correct amount into Social Security. One way to double-check this is to look at the 1065 K-1 cheat sheet (page two of the K-1). It shows the figure on Line 14A is to be entered on the 1040 Schedule SE, Section A or B.

What should you use?

Two choices:

  • If your borrower is a lower percentage owner or you are calculating actual cash flow to the borrower (regardless of ownership %):
  • K-1 Line N Withdrawals
  • PLUS K-1 Line 4 Guaranteed Payments
  • MINUS K-1 Line N Capital Contributed

This calculation tells you what the LLC Member or Partner actually took in cash, not what s/he paid Social Security on. You’ll show this calculation on the Partnership Tab of your Excel™ Global Cashflow Worksheet. (Order a current version of Linda’s Worksheet here.)

OR

  • If your borrower is a higher percentage owner (common guideline is 20-25%+), I recommend you determine what the company can actually afford. Using what they took when they have control of cash flow is risky.

Don’t double-count:

If you follow 1) or 2) above and also allow him credit for Line 14 Self-employment earnings you will be double-counting income.

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.