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Tax Return Analysis

Cash vs Property K-1 Distributions: Which do you count?

Tim’s question:

Previously the Federal IRS business tax returns would indicate whether a “distribution” was cash or property. There have been some changes to the K-1 in 2020/2021. Is there another area where we would look to confirm if a distribution is cash or property? Do we just have to rely on the borrower or accountant to confirm whether or not a distribution was cash or property?

Linda’s answer:

Distributions of property are reported differently for 1065-filing entities and 1120S-filing entities.

1120S does not distinguish between cash and property distributions to shareholders

S Corps (1120S) report distributions on K-1 Line 16 with a Code of D. But this does not distinguish between cash distributions and property distributions. Nor does the distributions listed on Schedule M-2 distinguish between cash and property. However, the IRS instructions for the 1120S-1 state: “If property other than cash was distributed, attach a statement to provide the following information.

  • The date the property was acquired.
  • The date the property was distributed.
  • The property’s FMV on the date of distribution.
  • The corporation’s basis in the property.”

So, if the distribution is property instead of cash, you may be able to find a schedule with this information attached to the return.

1065 does report cash and property distributions separately

The 1065-filing entities (Partnerships and some LLCs) do distinguish between cash distributions and property distributions. So, with those, it will be easier to see which it was.

What difference does cash vs property distributions make in your analysis?

If you only will count cash distributions in a k-1 cashflow calculation, which is understandable, it is important to know which it is. If the property distributions were in lieu of cash, and the entity had plenty of cash they could have distributed, I am not sure it makes an important difference.

As usual, you need to understand your guidelines. Do you only count cash distributions or do you consider property distributions as well? How can you tell if the property distribution was simply in lieu of cash, which was available, or not? As an example, I might count $40k in distributions if

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.