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February 5, 2018

Distributions from General Partnership to C-Corporation

Higgins asks:

I see a partnership has made distributions to various C-corporations. The C-corporations received Schedule K-1s showing the distributions. Where on form 1120 would I see these distributions? Is there any spot that shows that the distributions were received? Here are the specifics:

  • The partnership distributed $626,622 to a C-corp.
  • The C-corp’s share of ordinary business income is $637,438 as the K-1 shows, which is the same number shown on the C-corp’s gross sales line.
  • The C-corp then pays its owner $513,476, which matches the owner’s personal tax return.

I want to make sure I am not missing where the full $626,622 distribution goes to. Can you provide some insight where I might look?

Linda says:

To clear this up, consider what happens when a 1040-filing entity, a.k.a. an individual, receives a distributions from a partnership. We only know about it if we get the K-1. What we see on the 1040 Return, on Schedule E page two, is the partners share of taxable income.

The same is the case for a C-corp that is a partner in a partnership. The share of taxable income is reported to the C-corp, as you described. The distributions are not.

Where do distributions from a Schedule C show up on a 1040?

To take the analogy further, think about a Schedule C business. Whether it is a sole proprietorship or a one-owner LLC, the owner does not get taxed on his/her withdrawals. S/he gets taxes on the taxable income (net profit) of the business.

IRS does not tax distributions of capital

The fact is that owners of any kind of pass through business do not get taxed on distributions or withdrawals. They all get taxed on share of taxable income.

So the only place you will see cash distributions is the K-1.

What is a lender to do?

Consider subtracting the reported revenue and substituting distributions if you think that is a more meaningful number.

Alternatively, convert the taxable income into cash flow available by going back to the partnership and adding back depreciation, other non cash expenses and nonrecurring expenditures. Then subtract principal due in the next twelve months and nondeducted expenses. Use the result, cash flow available to the C-corp, instead of the C-corp’s share of taxable income. That makes the most sense if the C-corp is a majority owner and controls what they take.

Online Modules that cover Pass Through Taxable Income

Higgins, the issues that come up with pass through entities are the most challenging to lending and credit professionals, in my experience. At our online training site, www.LendersOnlineTraining.com, seven of the 35 modules are the most relevant:

  • Types of Entities
  • 1065 Overview
  • 1065 Company Cash Flow
  • 1065 K-1 and Owner Cash Flow
  • 1120S Overview
  • 1120S Company Cash Flow
  • 1120S K-1 and Owner Cash Flow

Online Training for Credit Professionals

Click here to learn more about these and other modules in the training.

Click here to download the PDF flyer: Lenders-Online-Training-Info

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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.

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