How should a financial institution best capture business cash flow or handle K-1 distributions?
This video is a segment taken from a recent webinar hosted by Sageworks and DM Analytics LLC’s owner, Dave Matricciano. For the full recording, visit “Global Cash Flow Analysis – What, When, Why, and How”.
From the video
The challenge with owners of Partnerships or S-Corporations is the issue of pass-through income or loss and how to separate the two. The best way to address Income or Loss from a Partnership (Tax Form 1056) or S-Corporation (Tax Form 1120s) is the K-1 included in the business’s tax package. The Schedule K-1 documents the owners’ share of changes in owners’ equity the gains or (losses) the business may have incurred as well as any distributions or contributions.
If you have the business financials (or the K-1), then you can see if distributions were made or if the available funds were reinvested in the company (no distribution) and redirected to other items, such as debt reduction. The Schedule E Part II is available cash flow that the owner may access. With the K-1, there is no guessing – the business has paid it out to the owner, unlike what is reflected on the available business cash flow (E part II).
The 1120S (S-Corp) K-1 shows both the borrower’s available ownership in line 1: Ordinary business income (loss); (by the way, this is the same amount as shown on the E part II). Line 16(D) will show the distributions, if any. The 1065 (Partnership) will show the information in the Section L: Partner’s Capital Account Analysis: Capital Contributed and Withdrawals and Distributions. You will also see it in the Part III, 19A: Distributions.
For more in-depth information on the biggest obstacles credit analysts face with global cash flow, download the whitepaper titled: The Definitive Guide to Global Cash Flow.