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Tax Return Analysis

Pass-Through from a K-1: Count Qualified Dividends?

Amy’s question:

If a 1065 K-1 reports qualified dividends paid to an individual partner in the amount of $50,000, and that same amount is shown on the partner’s 1040 tax return, schedule B, is this considered actual cash flow or just pass through income?

That same partner, on that same 1065 K-1, is showing $200,000 in distributions so we, of course, include the distributions as actual cash flow but I was not 100% sure on the qualified dividends.

Linda’s answer:

Change your wording

I would like to change your phrasing, Amy. The K-1 did not report qualified dividends ‘paid’ to the partner of $50,000. It reported qualified dividends ‘passed through’ to the partner of $50,000. Even thinking the word ‘paid’ will confuse the issue.

Cash vs pass-through

The $50,000 will be reported on Schedule B and the individual partner will pay taxes on it. With a pass-through entity, someone must pay. And that someone is the partner (or partners). The 1065-filing entity does not pay taxes.

You are correct to include the $200,000 distributions as actual cash flow to the partner. You did not mention % ownership, but some lenders would include actual distributions if 25% or less and would use owner % share of the available cashflow if over 25%. That is a guideline issue.

Variations for global analysis

Another variation: Might you be analyzing on a global basis, focused on the partnership, and including this owner as a guarantor? If so, include the distributions on the personal analysis and subtract distributions made by the partnership. This will wash if the partner is the sole owner. But if there are numerous owners and not all of them will guarantee, this will capture the distributions made out to other owners in the global cashflow available to pay debt.

Historical vs projected

Counting the distributions is correct for historical analysis. If you are projecting, utilize several year’s tax returns or information from discussions with the borrower to better decide if that $200,000 will be a continuing source of cashflow to the partner.

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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.