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Pass-through Section 1231 income?

Your question:

I am working on a loan the business is a farm (berries). I am looking at his partnership returns and at Schedule K Line 10 Other Income of $69,544. This amount is shown on Form 4797 Sale of Business Property as total gains. This amount does not show on the 1040. Can I use the $69,544?

Linda says:

At the business level, this is taxable gain not shown on page one of the 1065. Check the 4797 for the current year and past year to see if you think it is recurring. Also consider if you need to determine the cashflow or if it is okay to use the gain amount.

In the personal return, however, the individual partner’s share is likely in AGI. Double check the 1040. Here is the path:

  • An amount on Schedule K, Line 10 of the Form 1065 should be pro-rated to the partners’ Schedules K-1, Line 10. You should find $69,544 X Owner/Guarantor’s % Profit/loss.
  • From there, if it is a gain, it should go to the Form 4797 attached to the partner’s 1040 tax return. It may not show detail except to say ‘From Partnership K-1’
  • And from that form it will go to one of two places:
    • Page One of the 1040 at Line 14: Other Gains or Losses
    • Schedule D, Line 11

To summarize:

  • For historical business cashflow, include it (but consider if the taxable gain is the same as cashflow).
  • For recurring business cashflow, compare the years to see if you think it was a one-time thing or the typical sales of their product. Section 1231 would not generally be recurring but check it out.
  • For personal cashflow, consider whether you will use
    • The actual cashflow from the K-1, in which case be sure not to include the pass-through on the personal Form 4797 (and onto Page One Line 14 or Schedule D Line 11 of the 1040).
    • Cashflow available. In that case, give the partner credit for his/her share of the 1065 cashflow. You still will need to be sure not to include the pass-through on the personal Form 4797 (and the 1040 Page One Line 14 or Schedule d Line 11).
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.