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K-1 Question from Lenders: Can I use Self-employed income?

I get questions all the time from bank and credit union lenders on lending to businesses and to business owners. Here is one from last week: Can I use the self-employed income on the 1065 K-1?

Wouldn’t that be easy?

The 1065 K-1 has a line for ‘Self-employed Income’. It is Line 14 on the 2009 K-1. It is already calculated for you. Easy, right?

Yes, but it is not what you need!

Sorry, can’t use it.

Self-employed income is the taxable income on which the partner/LLC member must pay into social security. It is a combination of their share of the ordinary (taxable) income and, if they are receiving any, their share of guaranteed payments.

(If you don’t know what guaranteed payments are, use my site-wide search box to find out.)

Never* use taxable income as if it were cash flow

* I should know better than to use the word ‘never’ but this is a pretty good time.

There are three choices for cash flow to use when calculating owner cash flow from a closely-held company.

  1. The owner’s share of taxable income
  2. What the company actually paid to the owner
  3. What the company can afford to pay

The self-employed income reported on 1065 K-1, Line 14 (2009 return) falls into the first category. And we do not lend to businesses nor to business owners based on taxable income, right? If we did, we would just use AGI and call it good.

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.