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Tim’s question:

Typically when I see a distribution along with a capital contribution on a K-1 I’ll net the two numbers and input the net number in the personal cash flow. What if there is no distribution but a capital contribution, should the capital contribution be deducted from the personal cash flow?

Linda’s answer:

Hi, Tim!

My first question would be if the capital contribution looks like a one-time or unusual situation. Is it just to cover losses or is it to cover a one-time purchase of an asset? If it is clear it is not typical I might not count it at all for projections.

I am assuming you are talking about <25% owner because with more than 25% I would be looking at the entity return anyway and it would be more clear what is happening in the business with cash flow.

Finally, if you believe the capital contribution is typical, and there is no distribution, you might end up with a negative number flowing into the personal analysis.

Does that answer your question? A pleasure, as always, hearing from you.

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Linda Keith, CPA

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.