Say “Yes” to good loans.
3
SECTION
Beyond the 1040:
Corporation
Partnership &
LLC Returns
Partnerships
PC/V1
3-2
Section 3: Partnerships
BEYOND THE 1040
General information
Form 1065
Used by general partnerships, limited
partnerships, limited liability companies
and limited liability partnerships.
Section 1 of this manual has detailed
descriptions along with advantages and
disadvantages of each of these types of
entities.
Schedule K-1
The K-1 is a schedule within the Form
1065. ( There is a K-1 in an 1120S as well so
do not get confused between the two.)
Pass-through Entity
The 1065 (like the 1120S) is a pass-through
entity. Income, deductions and credits
retain their character as they pass through
to the owner’s return.
The diagram at right assumes the
partner is an individual. The partner can
also be another partnership or other
entity.
Self Study Students:
1) Read the sections on general and
limited partnerships and limited liability
companies (Section 1).
2) Refer to the completed Bailey 1040
analysis and Bailey Drug Store 1065
analysis on the following pages. Follow
along on the completed worksheet as
you review each page of the tax return.
3) A practice case on Able Baker Book
Store 1065 is in Section 6 for your use.
 Linda Keith CPA, Inc. February 2012
PC/V1
Section 3: Partnerships
LINDA KEITH, CPA
What Does It Look Like?
General Partnership
Limited Partnership
Limited Liability Company
Information only!
1040
1065
K-1
A
u
C o n t r ib
le
b
a
it
r
a
t io n s
Ch
Interest/Dividends
BCu a p i t a l G
sin
ains/
ess
Lo s s e
Actual Cashflow to Partner:
s
Inc
Use K-1.
om
e/L
os
Cashflow Available to Partner:
s
Use partner’s share of Form
1065 cashflow plus his/her
guaranteed payments.
K-1
Pass-throughs or
allocations
B
D
E
Analysis of Bailey Drug Store 1065
On the next pages you will find blank
forms to use in this section. On the
following two pages is a completed
analysis of Bailey Drug Store’s 1065, along
with the 1040 analysis of the Baileys.
Personal lenders are likely to start with
the 1040 analysis. Once it is determined
that the Bailey’s own a significant interest
in the partnership, the personal lender will
likely get the business return to consider
cashflow available from the business. After
all, a high percentage owner can take
what he or she wants to take.
Commercial lenders lending to Bailey
Drug Store are likely to start with the
1065. Once you determine the business
loan is a good possibility, you are likely to
need a personal guarantee. Thus you’ll get
the 1040 of the owner and analyze their
personal situation.
So, we’ll all look at the return of the
business and of the high % owner at some
point.
PC/V1
 Linda Keith CPA, Inc. February 2012
3-3
<Total Net Cas
3-4
Entity Name
Section 3: Partnerships
Tax
BEYOND THEForm
1040Type
PLUS
PLUS
PLUS
(MINUS) K-1
EQUALS
Summary worksheet OTHER
1065 K-1
Scorp/
Actual Net
1065
K-1
1120S
K-1
Guaranteed
1065 K-1
LLC/
cash flow
Contributions
Distributions Withdrawals Payments
1065 GP/ Ltd
from/(to)
L or 19
Ln 4
L
entity
1120S P
% Own Ln 16 'D'
Use for
1040
Analysis:
Yes or No
Type of Loan
For Business Cashflow:
Consumer and mortgage lenders will use
the K-1 Summary or the full Partnership
worksheet, depending on your borrower’s
percentage ownership and whether you
want to use actual cashflow or cashflow
available. Your guidelines will give you the
% cutoff. Mortgage lending typically uses
a 25% threshold. I’ve seen from 15% up to
50%.
Business lenders may also use the K-1
summary when looking at the personal
analysis of a guarantor.
Start with Sections A, B and C. Determine
if cashflow and debt coverage ratio meet
your guidelines.
If not, don’t give up. It may be the
owner/guarantor’s are taking excess funds
out of the company but have excess
liquidity in their personal balance sheet.
If you are getting their signature, the
fact that extra cashflow is not left in the
company may not be a barrier.
To check cashflow of the owner/
guarantor, continue with Section D.
K-1 Worksheet:
For Personal Cashflow Available:
This will calculate the actual cashflow from
the pass-through entity to the owner.
Some lenders only add ‘cash’
withdrawals. See my note on page 3-23.
If you are digging for dollars, consider
whether capital contributions are
recurring by asking questions or looking
at previous year’s tax returns. If not, do not
subtract them.
You start the same way as the commercial
analysis. If you are working on a personal
loan, B:14 will be blank. It is for a proposed
business loan.
Most personal lenders do not use
Section C, Debt Coverage Ratio, in their
analysis. Excel tm will calculate it anyway.
In Section D, the worksheet subtracts
debt from business cashflow to arrive at
cashflow available to distribute. Skip D:18
unless your company guidelines require
this step.
Once you have cashflow available to
distribute, you calculate the owner/
guarantor’s share.
Since guaranteed payments are
subtracted in deriving taxable income,
and your owner/guarantor received some
of those guaranteed payments, you’ll add
that to the owner/guarantor’s share of
cashflow available to distribute to get
‘Available Personal Cashflow’.
Be sure to make a choice, this figure
(D:23) or actual K-1 distributions from the
K-1 summary sheet...not both!
Partnership Worksheet:
The full partnership worksheet is
necessary to calculate business cashflow
and to determine an owner’s share of that
cashflow.
Work the tax return, not the worksheet!
Look for the 6 Ns as you go:
N onrecurring I ncome and E xpenses
N oncash I ncome and D eductions
N ontaxed I ncome & N ondeductible E xpenses
N ew I ncome & E xpenses
N ondocumented I ncome
 Linda Keith CPA, Inc. February 2012
PC/V1
Note other cas
entity such as
for building or
to/from shareh
manage/super
a related entity
Section 3: Partnerships
LINDA KEITH, CPA
Partnership Case Study worksheet
Form 1065 Partnerships
CAUTION: Use either Actual
Cashflow to the owner (K-1
Summary) OR Cashflow Available to
the Owner (from this worksheet) for
the 1040Pg1 Cashflow Worksheet.
Company name and type of business>>>
1
2
3
4
5
6
7
8
9
10
11
Business Cashflow Available to Pay Debt
Enter ordinary income (Ln 22)
Add back interest expense (Ln 15)
Add back depreciation (Ln 16a)
… +/- from Front Page, see comments:
… +/- from Line 20, see comments:
… +/- from Sch K, see comments:
…from Sch M-1, see comments below:
[Add 1-7] Cashflow Before debt & distributions
Subtract Cash distributions (M-2, Ln 6)
Add Capital contributions (M-2, Ln 2)
[8-9+10] Cashflow Available to Pay Debt
Front Page Adjustments: Consider
nonrecurring income/expenses or
unusual bad degts if projecting
cashflow.
Add'l
A:
Add'l from Line 20: Trace to
supporting schedule. Add back
nonrecurring items if projecting
cashflow. Add back noncash
amortization.
Borrower
Annual Debt
B:
Enter term debt annual payments
12
Enter LOC/ interest-only payments
13
Enter proposed loan payments
14
15 [Add 12 thru 14] Total debt
C:
Debt Coverage Ratio
16 [11/(12+13)] DCR Before Proposed Loan
17 [11/15] DCR After Proposed Loan
D:
18
19
20
21
22
23
Personal Cashflow to Owner/Guarantor:
Optional: Change to required DCR
[8-(15*18)]
[8-(15
18)] Cashflow Available to Distribute
Enter partner's % profit/loss from K-1
[19*20] Owner's share before gntd pmnts
Add this owner's guaranteed pmnts (K-1, Ln 4)
[21+22] Available Personal Cashflow
Use Available Cashflow in Personal Analysis?
Personal Cashflow to 1040 Pg 1
1.00
Yes or No
OR
Actual Personal Cashflow:
Use K-1 Summary sheet instead of this worksheet.
COMMENTS
PC/V1
Add'l from Schedule K: Consider
including income or expenses from
Lines 1-13 of the Schedule K. These
are not yet in your figures. If
projecting and they are
nonrecurring, leave them out.
Most commonly used are Line 2 for
rentals (calculate cashflow from
From 8825) and Line 5 for interest
income.
Line 12 Section 179 is depreciation
not in your figures so ignore here
here.
Line 13a charitable contributions
are not yet in your figures. Subtract if
you are doing actual/historical. If you
are doing recurring, consider if
business related and recurring
before subtracting.
Schedule M-1 Adjustments: These
figures are not yet in your cashflow
calculations. Line 4: Actual
Cashflow subtract cash outlays.
Recurring Cashflow only subtract if
recurring cash outlays. Line 6:
Actual Cashflow add cash received.
Recurring Cashflow only add if
recurring cash received.
 Linda Keith CPA, Inc. February 2012
3-5
3-6
Section 3: Partnerships
Bailey Completed
1040 Analysis
BEYOND THE 1040
On the next two pages, I have completed a personal 1040 and a partnership analysis
for the Baileys. Use them to follow along with the 1040 that satrts on page 3-8 and the
1065 that starts on page 3-12. See Sectgion 3 for the S Corporation that also feeds into
the Bailey’s personal analysis.
Borrower>>> Bill and Barnum Ann Bailey
AGI
W/ 1.2 DCR Actual K-1
Year>>>>
Amount
Amount
Amount
Adjusted Gross Income
164,896
164,895
164,895
Adjustments to:
Wages
C-Corp Owner from W/S
(1,031)
(1,031)
(1,031)
Interest
Full Note Payments Received
Tax-exempt
Dividends
State Tax
Alimony Received
Sch C Business from W/S
Capital Gains
Other Gains
IRA Distributions
Pension Distributions
Rents, Pships,etc
(122,733)
(122,733)
(122,733)
AGI: ALWAYS - gains/+ losses
0
125,108
3,659
0
121,143
(5,061)
97,475
0
0
Partnership C/F from W/S
Rental C/F from W/S
K-1 Summary
S Corp C/F from W/S
Estates/Trusts
Sch F Farm from W/S
Unemp Comp
Social Security
Other Income/NOL's
Adjustments or Other:
ie: AGI Add back All Adj.
ie: minus 1/2 SE Tax
ie: minus Fed/State Tax
ie: minus Family Living
ie: minus personal debt
169,900
14,158
157,214
13,101
138,606
11,551
Annual Cashflow
Monthly Cashflow
Prepared by>>> Linda Keith
Line
S/A
W/ 1.2 DCR Actual K-1
Amount
Amount
Amount
37
7
48,600
48,600
48,600
830
830
830
0
125,108
3,659
0
121,143
(5,061)
97,475
0
0
Frm 1120
8a/Sch B
From client
8b
9/Sch B
10
11
12/ Sch C
13/Sch D
14
15
16
17
E, Pg 1
E, Pg 2
E, Pg 2
E, Pg 2
E, Pg 2
18/Sch F
19
20
21
23-35
(8,298)
169,900
14,158
(8,298)
157,215
13,101
(8,298)
138,607
11,551
COMMENTS:
Column 1: With Available Cashflow from Partnership and SCorporation after business debt paid.
Column 2: With Available Cashflow from Partnership and SCorporation after adequate debt covereage of 1.2 DCR.
Column 3: Actual Cash to owner/guarantor from the Partnership and SCorporation.
 Linda Keith CPA, Inc. February 2012
PC/V1
K-1 Summary Sheet
Year: 2009
Bill and Barnum Ann Bailey
Bailey Drug Store 1065
Completed Partnersip Analysis Tax
Form
Entity Name
Bailey Drug Store
Bailey Fisheries
Type
0
PLUS
11,075
86,400
Section
3: Partnerships
3-7
97,475
LINDA KEITH, CPA
PLUS
PLUS
MINUS
1065 K-1
Scorp/
1065 K-1
1120S K-1
Guaranteed
1065 K-1
LLC/
Contributions
Distributions Withdrawals Payments
1065 GP/ Ltd
Ln 4
'07 L (Prior N)
1120S P
% Own Ln 16 'D' '07 L (Prior N)
1065 GP
60%
11,075
86,400
0
1120S Scorp
80%
0
EQUALS
Actual Net
cash flow
from/(to)
entity
97,475
0
Use for
1040
Analysis:
Yes or No
CAUTION: If you complete the K-1 Summary sheet for a partnership, LLC or S Corporation and also complete the Partnership or S Corpor
worksheet, you run the risk of including on 1040 Pg 1 both the actual cashflow to the owner/guarantor (this form) and the cashflow available
from the other worksheets. Notice you can calculate the actual cashflow here, and then in the second to the last column, indicate 'no'. That
Company name and type of business>>>
Bailey Drug Store
actual distributions for that entity will not flow to the 1040 Pg 1 and you are free to use cashflow available instead.
A:
Business Cashflow Available to Pay Debt
DEBT * 1.2
I have 1completed
the Bailey's
1040
on this K-1 Worksheet.
64,709 yes or no
64,709
Enter ordinary
income
(Ln Pg1
22) both ways, thus did not indicate
Add back interest expense (Ln 15)
Add back depreciation (Ln 16a)
… +/- from Front Page, see comments:
… +/- from Line 20, see comments:
… +/- from Sch K, see comments:
…from Sch M-1, see comments below:
[Add 1-7] Cashflow Before debt & distributions
Subtract Cash distributions (M-2, Ln 6)
Add Capital contributions (M-2, Ln 2)
[8-9+10] Cashflow Available to Pay Debt
15,802
15,859
15,802
15,859
1,187
1,187
97,557
(18,458)
97,557
(18,458)
79,099
79,099
33,043
33,043
33,043
33,043
Add'l
2
3
4
5
6
7
8
9
10
11
Annual Debt
Enter term debt annual payments
Enter LOC/ interest-only payments
Enter proposed loan payments
[Add 12 thru 14] Total debt
C:
16
17
Debt Coverage Ratio
[11/(12+13)] DCR Before Proposed Loan
[11/15] DCR After Proposed Loan
D:
18
19
20
21
22
23
Personal Cashflow to Owner/Guarantor:
Optional: Change to required DCR
[8-(15*18)] Cashflow Available to Distribute
Enter partner's % profit/loss from K-1
[19*20]
[19
20] Owner
Owner's
s share before gntd pmnts
Add this owner's guaranteed pmnts (K-1, Ln 4)
[21+22] Available Personal Cashflow
Use Available Cashflow in Personal Analysis?
Personal Cashflow to 1040 Pg 1
Borrower
B:
12
13
14
15
2.39
2.39
2.39
2.39
1.00
64,514
60
38 708
38,708
86,400
125,108
Yes
125,108
1.20
57,905
60
34 743
34,743
86,400
121,143
Yes
121,143
OR
OR
Actual Personal Cashflow:
Use K-1 Summary sheet instead of this worksheet.
COMMENTS
Debt ESTIMATED by adding pg one interest $15,802 to Sch L year-end principal
$17,241 = $33,043. Sch K: Line 5: $1,187 interest income. Line 13a: Did not
subtract charitable contributions…optional. Sch M-1 Ln 6: Did not add insurance
proceeds $7,800…nonrecurring.
COLUMN TWO: Entered Optional DCR (required debt coverage) of 1.2. Result will
show amount really available personally after adequate debt coverage for the
business. Your company's guidelines decide whether or not this step is taken.
PC/V1
 Linda Keith CPA, Inc. February 2012
3-8
Section 3: Partnerships
BEYOND THE 1040
 Linda Keith CPA, Inc. February 2012
Bailey 1040 Page one
PC/V1
Section 3: Partnerships
Bailey W-2
The partner’s 1040
I have included the owner’s 1040 first,
to show you how they information from
a partnership flows into the 1040 of the
owner.
The Baileys have an active interest in both
a partnership and an S corporation. Their
1040 starts at left. I have included just a
few of the relevant forms from that return.
The worksheet packet has AGI method
and Schedule Analysis method (SAM)
worksheets completed for this return. If
you are not ‘in class’, use the worksheets
on pages 6 & 7. Follow along.
Wages...see W-2 Line 5 above. It is also
$48,600.
AGI: No adjustment.
SAM: Use the $48,600.
PC/V1
LINDA KEITH, CPA
Interest...circle and trace to Schedule B.
Rentals, Partnerships, etc...DO NOT use
the number on the front page, Line 17. It is
just a placemarker.
AGI: Subtract $122,733 (you would add it
back if it were a loss).
SAM: Enter zero.
Both: Circle the number and trace it to
Schedule E on page 3-11.
SE tax...guidelines vary.
AGI: I made no adjustment.
SAM: I subtracted it. Your financial
institution may do the opposite or
subtract total federal taxes and even debt
or family living expenses. Check your
guidelines!
 Linda Keith CPA, Inc. February 2012
3-9
3-10
Section 3: Partnerships
BEYOND THE 1040
Bailey 1040 Schedule B
<<<Might Say ‘K-1 Interest’ or ‘Interest from a K-1’.
Note: This software listed the name of the Partnership and S
Corporation passing through the K-1 interest. Often, it will simply say ‘K-1 Interest’ or even “Interest from a K-1’. In either case, it
is noncash in this 1040 and should not be included in recurring
personal cashflow.
If you cannot tell if it is K-1 pass-through or actual payments
from a company, ask.
This Schedule B lists the partnership and
S Corporation but does not make it clear
that the interest is pass-through from a
K‑1. Often the listing will say ‘Interest from
a K‑1’ or ‘K‑1 interest expense’.
While it is not obvious that it is passthrough, we can confirm that on the K-1.
Low % Owner:
Exclude pass-through interest and
dividends from cashflow. The individual
partner or S corporation shareholder did
not receive this cash. You will determine
their actual cashflow by using withdrawals
and guaranteed payments from their K-1.
High % Owner:
Choice one...exclude pass-through
interest/dividends from personal cashflow
AND be sure to include it in the cashflow
of the partnership or S corporation when
you analyze the source entity.
Choice two... Include it in personal
cashflow. After all, the owner does have
access to it if a high enough %. If you do,
though, then you cannot add it again
 Linda Keith CPA, Inc. February 2012
when you do the 1065 or 1120S analysis.
You’ll find it there on Schedule K. With
this choice, you cannot also use actual
distributions from a K-1.
Case study:
We’ll use choice one. AGI method:
Subtract the $1,031 interest ($712 Drug
Store and $319 Fishery) from cashflow.
Schedule Analysis method: Include the
$830 interest from the bank.
Tax-exempt interest
May be listed here but will always be listed
on Page 1, Line 8b of the 1040. Use 1040,
Line 8b as your source for tax-exempt
interest. The Bailey’s had none.
The tax-exempt interest on Line 8b may
include K-1 pass-through interest as well.
We will be able to confirm that on the K-1
when we review it.
It will be important not to add taxexempt interest at the partnership or
S corporation level if you have already
included the pass-through in the personal
analysis.
PC/V1
Section 3: Partnerships
Bailey 1040 Schedule E, Page two
LINDA KEITH, CPA
Nonpassive = Business income of active general partner or active
S-Corporation shareholder or active LLC Member (Member-Manager)
While your guidelines are likely to require that you review all K‑1
information, my guess is that in general the greater likelihood of
income or risk of loss is on the nonpassive side.
Passive = Business/investment income if owner isn’t active
Includes Limited Partners and can include LLC Members/SCorp
shareholders. Generally not guarantors of debt (although they could be)
and therefore losses limited to investment in the activity.
Passive losses can be misleading, since the real loss may be greater
than the deductible loss due to passive loss limitations.
The K-1s least likely to be significant are small passive gains from RE
and Oil & Gas investments. One of my clients has a guideline that allows
ignoring income from any K-1 representing less than 10% of cashflow.
( They still subtract the paper loss, though.)
PC/V1
 Linda Keith CPA, Inc. February 2012
3-11
3-12
Section 3: Partnerships
BEYOND THE 1040
Form
U.S. Return of Partnership Income
1065
For calendar year 2011, or tax year beginning
ending
, 20
Overview
G See separate instructions.
Department of the Treasury
Internal Revenue Service
A
Bailey Drug Store
Principal business activity
OMB No. 1545-0099
, 2011,
2011
.
Name of partnership
D
Bailey Drug Store
93-0000000
Employer identification
number
Overview
Retail
B
Principal product or service
Drugs
C
Print
or type.
Number, street, and room or suite number. If a P.O. box, see the instructions.
E
1 Stop Place
06/03/76
City or town
Business code number
591200
State
Bailey
G Check applicable
boxes:
Overview
(1)
(6)
F
ZIP code
WA 98000
Initial return
(2)
Final return
(3)
Technical termination ' also check (1) or (2)
Name change
(4)
Date business started
Total assets (see instrs)
487,592.
$
(5)
Address change
Overview
Amended return
H Check accounting method:
(1)
Cash Overview
(2) X Accrual
(3)
Other (specify)
I Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year
J Check if Schedules C and M-3 are attached
Overview
2
Caution. Include only trade or business income and expenses on lines 1a through 22 below. See the instructions for more information.
1 a Merchant card and third-party payments (including amounts
reported on Form(s) 1099-K). For 2011, enter -0b Gross receipts or sales not reported on line 1a (see instructions)
c Total. Add lines 1a and 1b
d Returns and allowances plus any other adjustments to line 1a (see inst)
e Subtract line 1d from line 1c
2 Cost of goods sold (attach Form 1125-A)
3 Gross profit. Subtract line 2 from line 1e
I
N
C
O
M
E
I
N
S
T
R
S
F
O
R
L
I
M
I
T
A
T
I
O
N
S
7 Other income (loss)
* STMT
(attach statement)
8 Total income (loss). Combine lines 3 through 7
9 Salaries and wages (other than to partners) (less employment credits)
10 Guaranteed payments to partners
11 Repairs and maintenance
12 Bad debts
13 Rent
14 Taxes and licenses
15 Interest
Overview
16 a Depreciation (if required, attach Form 4562)
Equipment List
b Less depreciation reported on Form 1125-A and elsewhere on return
17 Depletion (Do not deduct oil and gas depletion.)
18 Retirement plans, etc
19 Employee benefit programs
Overview
4
5
6
Overview
Overview
Overview
16 a
16 b
Debt List
15,859.
83,497.
705,751.
249,360.
123,878.
17,228.
1,648.
36,541.
36,773.
15,802.
7
8
9
10
11
12
13
14
15
15,859.
16c
17
18
19
9,065.
* STMT 20
134,888.
21
22
641,042.
64,709.
21 Total deductions. Add the amounts shown in the far right column for lines 9 through 20
22 Ordinary business income (loss). Subtract line 21 from line 8
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is
true, correct, and complete. Declaration of preparer (other than general partner or limited liability company member manager) is based on all information of which
preparer has any knowledge.
A
Signature of general partner or limited liability company member manager
Print/Type preparer’s name
Paid
Preparer
Use Only
622,254.
3
20 Other deductions
(attach statement)
Sign
Here
Overview
2,360,509.
1,738,255.
4 Ordinary income (loss) from other partnerships, estates, and trusts
(attach statement)
See OtherSchedule
Income Statement
5 Net farm profit (loss) (attach
F (Form 1040))
6 Net gain (loss) from Form 4797, Part II, line 17 (attach Form 4797)
S
E
E
D
E
D
U
C
T
I
O
N
S
0.
2,360,509.
2,360,509.
1a
1b
1c
1d
1e
2
Preparer’s signature
A
May the IRS discuss this return
with the preparer shown below
(see instrs)?
Yes
Date
Date
Check
if
No
PTIN
self-employed
Firm’s name
Firm’s address
G
G
InoSelf-Prepared
N. Umbers
Firm’s EIN
G
123 Accountancy Way
SeaTax, WA 98584
BAA For Paperwork Reduction Act Notice, see separate instructions.
 Linda Keith CPA, Inc. February 2012
Phone no.
PTPA0112 10/27/11
Form 1065 (2011)
PC/V1
Overview
Section 3: Partnerships
LINDA KEITH, CPA
1065, Page One
How significant is the risk or the income?
In-depth or cursory review needed?
For personal Loans
Option I: Borrower is higher % owner.
If sufficient % ownership (see Schedule
K­‑1) per your guidelines, many lenders
include his/her share of partnership
cashflow in personal cashflow. The figure in AGI is a % of the taxable
income of the partnership...the bottomline of the 1065.
AGI Method: Subtract gain or add back
loss from the partnership on the 1040.
Schedule Analysis Method: Do not use
the figures on the 1040.
Both: Add owner’s share of business
cashflow plus guaranteed payments paid
directly to borrower (See K-1).
Option II: Borrower is lower % owner.
If your borrower’s % is low (based on
guidelines) then cash actually taken may
be used. See the notes opposite Schedule
K-1 (page 2-21) for instructions.
Overview
Pg 2 Sch B Lines 1 and 4 (See Pg 3-15)
Pg 3 Sch B Lines 6 and 8 (See Pg 3-17)
Pg1 Top Calendar or fiscal year
Pg 1 Box A&B Type of business
Pg 1 Box E Date started
Pg 1 Ln G Initial or final return...they may
have simply changed entity type. If so,
you may be looking at a partial year.
Pg 1 Ln H If cash basis, be careful drawing
conclusions from comparison.
Pg 1 Ln I # of K-1s (generally # of owners)
Pg 1 Ln 1c Gross receipts
Pg 1 Ln 4 Partner in another partnership?
Pg 1 Ln 9 Salaries other than to partners
Pg 1 Ln 10 ‘Compensation’ to partners...
see also partner withdrawals on M-2
‘10 Pg 2 Sch A Ln 3 or
‘11 1125-A Ln 3 Cost of labor
Pg 1 Ln 13 Rents
Pg 1 Ln 15 Interest (see shortcut at right.)
Pg 1 Ln 16 Depreciation... Review
equipment list if available for size/
scope of business and whether they are
replacing as a healthy business would.
PC/V1
Source of Adjustments to Line 22:
1st)
2nd)
3rd)
4th)
5th)
Page One
Other Deductions Schedule [Ln 20]
Schedule K [Lns 2-13]
Schedule M-1 [Lns 4 & 6]
Schedule M-2 [Commercial only]
General Cashflow Formula:
Start Line 22
Add Line 15
Minus Borrower
Plus Line 16a
Commercial Lenders
Minus M-2, Line 6
Plus M-2, Line 2
Ordinary Income
Interest^
Loan Payments*^
Depreciation
only:
Withdrawals
Capital contributions
^ Shortcut for debt... Two choices:
1) To estimate debt after adding back interest:
Page 1, Line 15 Interest _________
Sch L, Line 16, Col (d)
+________
ESTIMATED DEBT PMTS
=________
2) OR Do not add back interest and subtract
principal (Schedule L, Line 16, Column d).
* Debt Coverage:
Do not subtract debt.
Additional Line-by-Line Instructions:
1a. Up, down, sideways?
2. Compare COGS% to prior year.
4. What % do they own? Get K-1 or 1065.
Replace Ln 4 with cashflow.
6. G/L on disposal of assets...need to replace?
If casualty loss. Impact on future cashflow?
Adequate insurance?
7.Recurring?
10. G uaranteed payments: (See page 3-23)
11. Compare to prior years.
12. Bad Debts: Accrual only. Cash basis shows less
revenue if not paid. If large or nonrecurring,
consider if a write-off of old receivables. May
be noncash.
14. Enough? (At least 10%-40% of Line 9)
15. Add back interest and subtract debt. ( We’ll
use the shortcut.)^
16a.Add back depreciation.
18. Add back if optional.
20. Trace to supporting schedule. Adequate
insurance? Add back amortization or
nonrecurring items.
 Linda Keith CPA, Inc. February 2012
3-13
3-14
Section 3: Partnerships
BEYOND THE 1040
Form 1065 (2011)
Schedule B
1
a
Bailey Drug Store
Other Information
93-0000000
What type of entity is filing this return? Check the applicable box:
b
Domestic limited partnership
X Domestic general partnership
c
e
Overview
Bailey Drug Store
Domestic limited liability company
Foreign partnership
d
f
Domestic limited liability partnership
Other
Page 2
Yes
No
Overview
2
At any time during the tax year, was any partner in the partnership a disregarded entity, a partnership (including an entity
treated as a partnership), a trust, an S corporation, an estate (other than an estate of a deceased partner), or a nominee or
similar person?
X
3
At the end of the tax year:
a Did any foreign or domestic corporation, partnership (including any entity treated as a partnership), trust, or tax-exempt
organization, or any foreign government own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of
the partnership? For rules of constructive ownership, see instructions. If ’Yes,’ attach Schedule B-1, Information on Partners
Owning 50% or More of the Partnership
X
b Did any individual or estate own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of the
partnership? For rules of constructive ownership, see instructions. If ’Yes,’ attach Schedule B-1, Information on Partners Overview
Owning 50% or More of the Partnership
4 At the end of the tax year, did the partnership:
a Own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of stock entitled
to vote of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If ’Yes,’ complete (i)
through (iv) below
(i) Name of Corporation
(ii) Employer
Identification
Number (if any)
1125-A
Cost of Goods Sold
X
(v) Maximum
Percentage
Owned in Profit,
Loss, or Capital
OMB No. 1545-2225
(December 2011)
Department of the Treasury
Internal Revenue Service
X
(iv) Percentage
Owned in
Voting Stock
(iii) Country of
Incorporation
b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital
in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For
rules of constructive ownership, see instructions. If ’Yes,’ complete (i) through (v) below
(i) Name of Entity
(ii) Employer
(iii) Type of
(iv) Country of
Identification
Entity
Organization
Number (if any)
Form
X
Form 1065 (2011)
PTPA0112
10/27/111120-S, 1065, and 1065-B.
G Attach to Form 1120, 1120-C,
1120-F,
Employer identification number
Name
Bailey Drug Store
1
2
Inventory at beginning of year
Purchases
3
4
5
Cost of labor
Additional section 263A costs (attach schedule)
Other costs (attach schedule)
6
7
Total. Add lines 1 through 5
Inventory at end of year
93-0000000
Overview
8
Cost of goods sold. Subtract line 7 from line 6. Enter here and on Form 1120, page 1, line 2 or the
appropriate line of your tax return (see instructions)
9 a Check all methods used for valuing closing inventory:
(i)
(ii)
(iii)
X
1
2
312,067.
1,771,294.
3
4
5
6
7
2,083,361.
345,106.
8
1,738,255.
Cost
Lower of cost or market
Other (Specify method used and att. expl.)
b Check if there was a writedown of subnormal goods
c Check if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970)
d If the LIFO inventory method was used for this tax year, enter amount of closing inventory computed
under LIFO
e If property is produced or acquired for resale, do the rules of section 263A apply to the corporation?
f Was there any change in determining quantities, cost, or valuations between opening and
closing inventory? If ’Yes,’ attach explanation
BAA For Paperwork Reduction Act Notice, see separate instructions.
 Linda Keith CPA, Inc. February 2012
9d
Yes
X
No
Yes X No
Form 1125-A (12-2011)
PC/V1
1065, Page Two
and Form 1125-A
‘11 Form 1125-A or ‘10 Schedule A
Cost of Goods Sold
Lines 1 & 7: Watch for a dramatic change in
inventory. Generally, the trend in inventory
should mirror the trend in sales.
A jump in inventory should usually be
accompanied by an increase in sales. If
not, they may be building up inventory
for expansion. Inventory buildup uses
part of the cashflow generated by the
business because the money is tied up in
inventory until the goods are sold and the
receivables collected.
If this trend continues, not all cashflow
generated by operations is available to
the owners in the form of compensation
or to the business to service debt unless
they are financing the buildup through
borrowing or capital contributed.
On the other hand, a severe drop in
inventory could signal cashflow problems.
Is it a permanent drop? Did they have a
year-end sale that has been made up in
beginning of the year purchases? If not,
will it be? Is the supplier now closer? Did
the company adopt ‘just-in-time’ inventory
methods that allow it to run on lower
inventory levels?
Section 3: Partnerships
LINDA KEITH, CPA
of a limited partner or limited liability
company member is less than of a general
partner.
Question 3b: If yes, decide if you need
the owner’s return for guarantor analysis.
Generally, % ownership over a certain
amount will be the determining factor.
20% or 25% is common.
The attached Schedule B-1 will list all
owners meeting this criteria. For the owner
you are lending to (or who is guaranteeing
your business loan) you will also find their
% ownership on their Schedule K-1.
Question 4(a&b): If yes, decide if you
need the corporate return, the partnership
return or the partnership Schedule K-1.
Generally, % ownership over a certain
amount will be the determining factor.
20% or 25% is common.
If you use either actual cashflow from
the Schedule K-1 or available cashflow
from an analysis of the Form 1065
Partnership return, be sure to subtract any
gain or add back any loss on this 1065,
Page One Line 4.
Line 3: Will include wages/ payroll taxes/
benefits for people working directly
on manufacture of product as well as
subcontractors.
Line 5: May include insurance. Look
here if the insurance on the supporting
schedule to the Others Deductions (Line
20) on Page One does not seem adequate.
Schedule B: Other Information
This section has been changing since the
2008 returns although it has about the
same information, just in slightly different
places. It also does not change what we
do with the information.
Question 1: If not a general partnership,
see entity explanation earlier in the
workbook. Note that the overall risk
PC/V1
 Linda Keith CPA, Inc. February 2012
3-15
3-16
Section 3: Partnerships
BEYOND THE 1040
Form 1065 (2011)
5
6
Overview
Bailey Drug Store
Bailey Drug Store
93-0000000
Page 3
Yes No
Did the partnership file Form 8893, Election of Partnership Level Tax Treatment, or an election statement under section
6231(a)(1)(B)(ii) for partnership-level tax treatment, that is in effect for this tax year? See Form 8893 for more details
X
Does this partnership satisfy all four of the following conditions?
a The partnership’s total receipts for the tax year were less than $250,000.
b The partnership’s total assets at the end of the tax year were less than $1 million.
c Schedules K-1 are filed with the return and furnished to the partners on or before the due date (including extensions)
for the partnership return.
X
d The partnership is not filing and is not required to file Schedule M-3
If ’Yes,’ the partnership is not required to complete Schedules L, M-1, and M-2; Item F on page 1 of Form 1065; or
Item L on Schedule K-1.
Is this partnership a publicly traded partnership as defined in section 469(k)(2)?
X
8
During the tax year, did the partnership have any debt that was cancelled, was forgiven, or had the terms modified so as to
reduce the principal amount of the debt?
X
9
Has this partnership filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide information on
any reportable transaction?
X
At any time during calendar year 2011, did the partnership have an interest in or a signature or other authority over
a financial account in a foreign country (such as a bank account, securities account, or other financial account)?
See the instructions for exceptions and filing requirements for Form TD F 90-22.1, Report of Foreign Bank and Financial
Accounts. If ’Yes,’ enter the name of
the foreign country. G
X
7
Overview
10
11
At any time during the tax year, did the partnership receive a distribution from, or was it the grantor of, or transferor to, a
foreign trust? If ’Yes,’ the partnership may have to file Form 3520, Annual Return To Report Transactions With Foreign Trusts
and Receipt of Certain Foreign Gifts. See instructions
12 a Is the partnership making, or had it previously made (and not revoked), a section 754 election?
See instructions for details regarding section 754 election.
b Did the partnership make for this tax year an optional basis adjustment under section 743(b) or 734(b)? If ’Yes,’ attach a
statement showing the computation and allocation of the basis adjustment. See instructions
X
c Is the partnership required to adjust the basis of partnership assets under section 743(b) or 734(b) because of a substantial
built-in loss (as defined under section 743(d)) or substantial basis reduction (as defined under section 734(d))? If ’Yes,’
attach a statement showing the computation and allocation of the basis adjustment. See instructions
X
13
Check this box if, during the current or prior tax year, the partnership distributed any property received in a like-kind
exchange or contributed such property to another entity (other than disregarded entities wholly-owned by the
partnership throughout the tax year)
14
At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or other undivided interest
in a partnership property?
15
If the partnership is required to file Form 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded
Entities, enter the number of Forms 8858 attached.
16
X
X
X
See instructions
G
Does the partnership have any foreign partners? If ’Yes,’ enter the number of Forms 8805, Foreign Partner’s Information
Statement of Section 1446 Withholding Tax, filed for this partnership.
G
17
Enter the number of Forms 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, attached
to this return
18 a Did you make any payments in 2011 that would require you to file Form(s) 1099? See instructions
b If ’Yes,’ did you or will you file all required Form(s) 1099?
19 Enter the number of Form(s) 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations,
attached to this return
X
G
X
X
Designation of Tax Matters Partner (see the instructions)
Enter below the general partner designated as the tax matters partner (TMP) for the tax year of this return:
Name of
designated TMP
If the TMP is an
entity, name of
TMP representative
Address of
designated TMP
Identifying
number of TMP
A
A
A
Phone number
of TMP
A
A
Form 1065 (2011)
PTPA0112 10/27/11
 Linda Keith CPA, Inc. February 2012
PC/V1
Section 3: Partnerships
1065, Page Three
LINDA KEITH, CPA
Question 6: If yes, they are not required
to complete Schedule L: Balance Sheet,
Schedule M-1, Schedule M-2, Item F on
Page 1 and Item J on the K-1. If you are
lucky, they’ll complete them anyway.
Question 8: The answer to this question
might be of interest. If yes, find out why.
Other Questions: If the answer is yes…
take a look.
Designation of Tax Matters Partner:
Often the partner designated is the
‘managing’ partner and has more day-today control than others.
PC/V1
 Linda Keith CPA, Inc. February 2012
3-17
3-18
Section 3: Partnerships
BEYOND THE 1040
Bailey Drug Store
Parent to the K-1s
KEY to Notes Below:
A Do not use...already on Page One.
B Cashflow rentals and add to worksheet.
C Add if recurring...generally assumed.
Form 1065 (2011)
Schedule K
1
2
D
E
F
G
Add gain/subtract loss if recurring.
Depreciation = Do not subtract
Optional? Check your guidelines
Subtract if recurring
Bailey Drug Store
Partners’ Distributive Share Items
93-0000000
1
2
Ordinary business income (loss) (page 1, line 22)
Net rental real estate income (loss) (attach Form 8825)
3 a Other gross rental income (loss)
3c
Guaranteed payments
4
5
6
Interest income
Dividends: a Ordinary dividends
5
6a
b Qualified dividends
c Unrecaptured section 1250 gain (attach statement)
10 Net section 1231 gain (loss) (attach Form 4797)
11 Other income (loss) (see instructions)
Type
Credits
C
7
8
9a
D
9b
9c
D
10
11
Cash contributions (50%)
c Section 59(e)(2) expenditures: (1) Type G
d Other deductions (see instructions) Type G
14 a Net earnings (loss) from self-employment
b Gross farming or fishing income
(2) Amount
c Gross nonfarm income
15 a Low-income housing credit (section 42(j)(5))
b Low-income housing credit (other)
c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468)
d Other rental real estate credits (see instructions)
Type G
e Other rental credits (see instructions)
Type G
f Other credits (see instructions)
Type G
16 a Name of country or U.S. possession
b Gross income from all sources
c Gross income sourced at partner level
Foreign gross income sourced at partnership level
d Passive category G
e General category G
Foreign
Deductions allocated and apportioned at partner level
Transactions
g Interest expense G
h Other
Deductions allocated and apportioned at partnership level to foreign source income
i Passive category G
j General category G
l Total foreign taxes (check one): G Paid
Accrued
m Reduction in taxes available for credit (attach statement)
n Other foreign tax information (attach statement)
17 a Post-1986 depreciation adjustment
b Adjusted gain or loss
Alternative
Minimum
c Depletion (other than oil and gas)
Tax
d Oil, gas, and geothermal properties ' gross income
(AMT)
Items
e Oil, gas, and geothermal properties ' deductions
f Other AMT items (attach stmt)
18 a Tax-exempt interest income
b Other tax-exempt income
Other
c Nondeductible expenses
Information
19 a Distributions of cash and marketable securities
b Distributions of other property
20 a Investment income
b Investment expenses
c Other items and amounts (attach stmt)
BAA
 Linda Keith CPA, Inc. February 2012
C
PTPA0134
09/06/11
12
13 a
13 b
13 c (2)
13 d
14 a
14 b
14 c
15 a
15 b
15 c
15 d
15 e
15 f
16 b
16 c
f Other
16 f
16 h
k Other
16 k
16 l
16 m
17 a
17 b
17 c
17 d
17 e
17 f
18 a
18 b
18 c
19 a
19 b
20 a
20 b
E
5,000.
188,587.
D
D
G
G
F
G
These lines are used by the preparer to complete the 1040’s or are items elsewhere on the return. I recommend you ignore them.
SelfEmployment
123,878.
A
1,187. C
6b
7 Royalties
8 Net short-term capital gain (loss) (attach Schedule D (Form 1065))
9 a Net long-term capital gain (loss) (attach Schedule D (Form 1065))
b Collectibles (28%) gain (loss)
Deductions
B
3b
4
12 Section 179 deduction (attach Form 4562)
13 a Contributions
b Investment interest expense
64,709. A
3a
b Expenses from other rental activities (attach stmt)
c Other net rental income (loss). Subtract line 3b from line 3a
Income
(Loss)
Page 4
Total amount
705,751.
7,800.
18,458.
1,187.
Form 1065 (2011)
PC/V1
Section 3: Partnerships
LINDA KEITH, CPA
1065, Page Four
SCHEDULE K: Partners’ Shares
Line 4 Guaranteed payments
Shows the allocations for income and
other items for all partners combined.
This is the parent to the K-1’s.
Notice all the lines! Partnerships (like
S corps) are ‘pass-through’ entities.
Income, credit and deduction items retain
their character as they move from the
partnership into the partners’ returns.
Many of these lines are completely
irrelevant to the lender and are used to
instruct the tax preparer.
Refer to the suggestions directly on
the form to the left. Since guidelines vary
among financial institutions, here is some
additional information.
These guaranteed payments have already
been deducted on Page One, Line 10 of
the 1065. They are shown as income here
only so the tax preparer can allocate them
to the income section of the K-1 of each
partner.
If you are doing a personal analysis, you
will use the K-1, Line 5 for the individual
partner you are analyzing. By definition,
the guaranteed payments are distributed
on a basis other than the profit and
loss percentage. (See page 3-23 for an
explanation of guaranteed payments.)
Line 1 Ordinary Business Income
Lines 5-11 Income (Loss)
Same explanation as Lines 2-3 above.
Since we start with Page One of the tax
return for our cashflow calculations you
started with this figure on Page One. Do
not pick it up again here.
Line 12 Section 179 expense deduction
Lines 2 Net Rental Real Estate
Lines 13 Deductions
If the partnership is formed solely to hold
real estate, the front page of the 1065 will
be blank and there will be a Form 8825
attached. (See page 3-26.) Another option
is for the partners to report only their
share of the rental on Schedule E of their
personal return.
Use the rental schedule of the 1040
cashflow worksheet to determine rental
cashflow. Add back depreciation on the
8825 even if you have added depreciation
back on Page 1 of the 1065. Rental
depreciation is not included on Page 1.
Bring the rental cashflow onto the
partnership instead of the 1040 worksheet
so the partner only gets credit for his/her
share.
Line 3 Income (Loss)
Lines 3 and 5-11 are not in your cashflow
calculations yet as they do not flow to the
front page of the Form 1065.
For historical cashflow, add if income or
subtract if loss.
For projections, only do so if you think it
is recurring.
PC/V1
Ignore. This is depreciation which was
not subtracted on Page 1 of the 1065
partnership return. No need to add back.
These items are not in your cashflow
calculations yet as they do not flow to the
front page of the Form 1065.
For historical cashflow, subtract them.
For projections subtract only if recurring.
Line 13a is charitable contributions
and many lenders either do not
subtract them or make note of them in
written commentary since they can be
discontinued if needed.
Line 13b Investment Interest may
already be taken into consideration on
the debt list from your borrower. However,
it is interest expense over and above
that reported on Page One of the 1065
partnership return. If it is similar to margin
interest on a stock broker account and it is
recurring, subtract it.
Ignore the Rest!
The remaining lines provide information
to the tax preparer or are duplicates of
information you’ll find elsewhere.
 Linda Keith CPA, Inc. February 2012
3-19
3-20
Section 3: Partnerships
BEYOND THE 1040
Bailey Drug Store
Bailey Drug Store
Analysis of Net Income (Loss)
93-0000000
Form 1065 (2011)
1
Net income (loss). Combine Schedule K, lines 1 through 11. From the result, subtract the sum of
Schedule K, lines 12 through 13d, and 16l
(i) Corporate
(ii) Individual
(iii) Individual
(iv) Partnership
Analysis by
(active)
(passive)
partner type:
2
a
General
partners
Balance Sheets per Books
(a)
Assets
1 Cash
2 a Trade notes and accounts receivable
b Less allowance for bad debts
3 Inventories
4 U.S. government obligations
5 Tax-exempt securities
6 Other current assets (attach stmt)
Ln 6 Stmt
7 a Loans to partners (or persons related to partners)
b Mortgage and real estate loans
8 Other investments (attach stmt)
9 a Buildings and other depreciable assets
b Less accumulated depreciation
10 a Depletable assets
b Less accumulated depletion
11 Land (net of any amortization)
12 a Intangible assets (amortizable only)
b Less accumulated amortization
Ln 13 Stmt
13 Other assets (attach stmt)
14 Total assets
Liabilities and Capital
15 Accounts payable
16 Mortgages, notes, bonds payable in less than 1 year
Ln 17 Stmt
17 Other current liabilities (attach stmt)
18 All nonrecourse loans
19 a Loans from partners (or persons related to partners)
b Mortgages, notes, bonds payable in 1 year or more
Ln 20 Stmt
20 Other liabilities (attach stmt)
21 Partners’ capital accounts
22 Total liabilities and capital
Beginning of tax year
(b)
End of tax year
(c)
58,472.
2
Income included on Schedule K, lines 1,
2, 3c, 5, 6a, 7, 8, 9a, 10, and 11, not
recorded on books this year (itemize):
3
4
Guaranteed pmts (other than health insurance)
Expenses recorded on books this year not included
on Schedule K, lines 1 through 13d, and 16l
(itemize):
a Depreciation
$
b Travel and
entertainment
$
61,815.
141,389.
105,085.
54,755.
312,067.
61,815.
345,106.
24,567.
22,017.
151,369.
120,944.
36,304.
1,100.
487,265.
68,811.
16,891.
17,562.
123,878.
192,574.
5 Add lines 1 through 4
Schedule M-2 Analysis of Partners’ Capital Accounts
215,129.
1 Balance at beginning of year
Busn Cashflow: Add
3
4
a Cash
b Property
Net income (loss) per books
Other increases (itemize):
5
Add lines 1 through 4
7
Principal >
due in
next twelve
months
Deductions included on Schedule K, lines 1 through
13d, and 16l, not charged against book income this
year (itemize):
a Depreciation
$
8
Add lines 6 and 7
9
Income (loss) (Analysis of Net Income (Loss), line 1).
Subtract line 8 from line 5
6
Distributions:
7
a Cash
b Property
Other decreases (itemize):
8
9
Add lines 6 and 7
Balance at end of year. Subtract line 8 from line 5
Capital contributed:
62,862.
17,241.
16,695.
125,310.
117.
265,367.
487,592.
< Add
(recurring)
cash rec’d,
7,800.
otherwise
ignore.
7,800.
184,774.
Busn Cashflow: Subtract
18,458.
68,696.
283,825.
PTPA0134 09/06/11
 Linda Keith CPA, Inc. February 2012
30,425.
2,137.
487,592.
included on Schedule K, lines 1 through
11 (itemize):
$
a Tax-exempt interest
Ln 6 Stmt
7,800.
* STMT
< Subtract
(recurring)
cash spent,
otherwise
ignore.
(d)
26,092.
54,755.
167,809.
1,063.
215,129.
487,265.
Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return
Note. Schedule M-3 may be required instead of Schedule M-1 (see instructions).
68,696. 6 Income recorded on books this year not
1 Net income (loss) per books
2
184,774.
(vi) Nominee/Other
184,774.
b Limited
partners
Schedule L
1
(v) Exempt
organization
Page 5
18,458.
265,367.
Form 1065 (2011)
PC/V1
Section 3: Partnerships
LINDA KEITH, CPA
1065, Page Five
Schedule L: Balance Sheets
Line 6 Nontaxed Income
Increases in assets use up cashflow
generated from operations, as do
decreases in liability and capital balances.
Purchase of equipment, for example, uses
cashflow.
On the other hand, a decrease in assets
is a source of cash. Examples: selling
equipment or investments. Reducing
inventory levels will free up cash as well.
Increasing liabilities ...borrowing money...
is a source of cash as is increased capital
contributions by the owners.
Tax returns show you history. Cashflow
generated from operations used last year
to build up cash balances or inventory, or
pay down debts, may be used differently
next year. If the inventory levels are now
stable the cashflow used to build them
up last year may be available to your
borrower this year for other uses.
Historical: Add cash received, otherwise
ignore. Projecting: Add recurring cash
received, otherwise ignore.
BOTH: See exception for tax-exempt
interest below.
If present, the partner’s share of taxexempt interest has already been included
in Form 1040, Line 8b.
If you are doing a personal analysis and
have added the tax-exempt interest from
Line 8b to the personal cashflow, do not
also add tax-exempt interest from M-1
Line 6 to partnership cashflow.
When doing a business analysis, DO add
tax-exempt interest to cashflow.
Bailey Drug Store is showing $7,800 on
Line 6. When you trace it to the supporting
schedule you will find that it is insurance
proceeds (see page 3-28).
‘Insurance proceeds’ does not sound like
recurring cashflow so I will not add it.
Shortcut for debt:
Schedule L, Line 16, column (d) principal
due in the next 12 months can be used in
debt estimates. This will not be a good
estimate when:
1) Debt levels are changing;
2) Line 16 includes a balance on a
commercial line of credit; or
3) Line 16 does not include current
portion of long-term debt.
Alternate method: Some financial
institutions start the cashflow analysis
with M-1, Line 1 instead of the bottom line
of Page One. In that case, you will need
to make adjustments for all noncash and
nonrecurring items on all lines of the M-1.
Schedule M-1: Reconciliation
This schedule is a source of nontaxed
income and nondeductible expenses.
Any items reported on the M-1 have not
been reported on Page One or the Other
Deductions (Line 20) Schedule.
Schedule M-2: Analysis
Line 2a: Capital contributed during the
year represents cash put into the business
by all partners. Capital contributed may be
recurring.
Commercial lenders will add this to
historical cashflow, and may add it to
recurring cashflow.
Line 6a: Commercial lenders may wish to
subtract this from partnership cashflow if
it represents typical compensation to the
partners. This reduces cashflow available
to pay debts or grow the business.
If you subtract Line 6a also add Line
2a, capital contributed, back in. This way
you only count net withdrawals against
business cashflow.
In my solution, I subtracted the $18,458.
Line 4 Nondeducted Expenses
Historical: Subtract cash spent, otherwise
ignore. Projecting: Subtract recurring cash
spent, otherwise ignore.
PC/V1
 Linda Keith CPA, Inc. February 2012
3-21
3-22
Section 3: Partnerships
BEYOND THE 1040
Bailey Drug Store
651111
2011
Schedule K-1
(Form 1065)
For calendar year 2011, or tax
Department of the Treasury
Internal Revenue Service
year beginning
, 2011
ending
Information About the Partnership
1
Ordinary business income (loss)
Partnership’s employer identification number
B
Partnership’s name, address, city, state, and ZIP code
93-0000000
OMB No. 1545-0099
15
Credits
16
Foreign transactions
38,825.
2
Net rental real estate income (loss)
3
Other net rental income (loss)
4
Guaranteed payments
Add for
Partner Cashflow
86,400.
A
C
Amended K-1
Part III Partner’s Share of Current Year Income,
Deductions, Credits, and Other Items
,
Partner’s Share of Income, Deductions,
G See separate instructions.
Credits, etc.
Part I
Final K-1
5
Interest income
712.
Bailey Drug Store
1 Stop Place
Bailey, WA 98000
6 a Ordinary dividends
IRS Center where partnership filed return
7
Royalties
8
Net short-term capital gain (loss)
6 b Qualified dividends
Ogden, UT
D
Check if this is a publicly traded partnership (PTP)
Part II
E
9 a Net long-term capital gain (loss)
Information About the Partner
Partner’s identifying number
Partner’s name, address, city, state, and ZIP code
G
X General partner or LLC
Limited partner or other
LLC member
H
X Domestic partner
Foreign partner
J
member-manager
What type of entity is this partner?
K
L
Net section 1231 gain (loss)
18
11
Other income (loss)
B
Partner’s share of liabilities at year end:
Nonrecourse
Qualified nonrecourse financing
Recourse
$
$
$
Partner’s capital account analysis:
Beginning capital account
Capital contributed during the year
Current year increase (decrease)
Withdrawals and distributions
Ending capital account
$
$
$
$
$
19
12
85,531. 14
47,804. A
Distributions
A
Section 179 deduction
11,075.
Other deductions
3,000. 20
Other information
A
712.
Self-employment earnings (loss)
125,225.
C
423,451.
129,077. *See attached statement for additional information.
41,217.
11,075.
159,219.
GAAP
Section 704(b) book
Other (explain)
Did the partner contribute property with a built-in gain or loss?
X No
Yes
If ’Yes’, attach statement (see instructions)
4,680.
Code of ‘A’ means
Cash Distributions
60.00000 % 13
60.00000 % A
60.00000 %
60.00000 %
60.00000 %
60.00000 %
X Tax basis
M
10
Individual
Partner’s share of profit, loss, and capital (see instructions):
Beginning
Ending
Profit
Loss
Capital
Tax-exempt income and
nondeductible expenses
9 c Unrecaptured section 1250 gain
Barnum Ann Bailey
747 Stone Ave
Bailey, WA 98000
I
Alternative minimum tax (AMT) items
9 b Collectibles (28%) gain (loss)
666-77-8888
F
17
F
O
R
I
R
S
< Subtract for Partner Cashflow
< Add for Partner Cashflow
U
S
E
O
N
L
Y
BAA For Paperwork Reduction Act Notice, see Instructions for Form 1065.
Schedule K-1 (Form 1065) 2011
PTPA0312
 Linda Keith CPA, Inc. February 2012
08/18/11
PC/V1
Section 3: Partnerships
LINDA KEITH, CPA
1065: Schedule K-1
Partner’s Share of Income, Etc.
withdrawals:
This is part of the Form 1065, not the Form
1040. You may request the Schedule K-1
only or the full Form 1065 with the K-1.
As discussed earlier, you need both if the
borrower has a high % ownership. Actual
cashflow to the partner as evidenced by
the K-1 may not be as enlightening as
cashflow available to the partner from
business operations as evidenced by the
full return.
Item G: If a limited partner, they are more
like an investor than self-employed or a
business owner. See limited partnerships
discussion in Section 1.
Item J: This gives an indication of the
partner’s percentage of profit or loss in the
business. You also can determine the %
ownership of capital. Use it to decide if the
partner could access additional cashflow
generated by the business. Your guidelines
should indicate at what % ownership you
use the full 1065 if you are working on a
partner’s personal cashflow.
Top of the right column: Notice if this is
the final K-1.
Add the withdrawals figure even if the
K-1 shows it as a negative (minus sign
or brackets). It is negative from the
perspective of the partnership. It is always
positive to the partner.
If the withdrawals are not cash (see code
for Line 19 on Page 2 of the K-1) you may
not wish to count them. Consider whether
the withdrawal of property other than
cash was in lieu of cash and therefore
could be counted.
The figure on Schedule E, Form 1040 is
a combination of Line 1, Ordinary Income
and Line 4, Guaranteed Payments.
Formula for Actual Cashflow
(Generally low % partners):
1) Add Section L: Withdrawals
(Section N: 2006 returns.
Cash only? See Code Line 19)
2) Plus Line 4: Guaranteed Payments
3) Less Section L: Capital Contributed
(Section N: 2006 returns.
Consider if recurring)
Withdrawals
+ Guaranteed Payments
- Capital Contributed
= Actual Cash
PC/V1
Guaranteed Payments: Line 4
Payments made on a basis other than
the agreed income/loss split: frequently
payment for time spent in the business.
Thus, two people may be 50/50 partners,
but one works full time and the other only
half time. They could agree to be paid $20/
hour worked as guaranteed payments.
Excess profits are split 50/50.
When to use the formula:
The formula is generally used for low %
(noncontrolling) owners only. Check your
guidelines to find out when you must get
the full 1065 instead. A 25%+ ownership
guideline is common.
If the partner % ownership is higher:
Consider giving the partner credit for:
1) Share of cashflow generated from
operations left over after guaranteed
payments paid to all borrowers. (If
negative, count against personal
cashflow.)
2) Also add his/her guaranteed payments.
Their share of guaranteed payments is
not based on profit/loss % so you must
use the actual amount from Line 4 of the
K-1.
Residential Secondary Market lenders:
I have seen secondary market residential
lending worksheets that use Line 1
Ordinary income plus Line 4 Guaranteed
Payments for low % owners. This does not
make sense to me but if that is what your
guidelines call for, use it.
 Linda Keith CPA, Inc. February 2012
3-23
3-24
Section 3: Partnerships
BEYOND THE 1040
Bailey Drug Store
Schedule K-1 (Form 1065) 2011
Barnum Ann Bailey
93-0000000
Page 2
This list identifies the codes used on Schedule K-1 for all partners and provides summarized reporting information for partners who file Form 1040. For detailed reporting
and filing information, see the separate Partner’s Instructions for Schedule K-1 and the instructions for your income tax return.
Code
Report on
1 Ordinary business income (loss). Determine whether the income (loss) is passive
or nonpassive and enter on your return as follows.
J
Work
opportunity
credit
Report on
K Disabled access credit
Passive loss
See the Partner’s Instructions
L Empowerment zone and renewal community
Passive income
Schedule E, line 28, column (g)
2
3
Nonpassive loss
Nonpassive income
Net rental real estate income (loss)
Other net rental income (loss)
Schedule E, line 28, column (h)
Schedule E, line 28, column (j)
See the Partner’s Instructions
M
N
Net income
Schedule E, line 28, column (g)
Net loss
See the Partner’s Instructions
O
P
4 Guaranteed payments
5 Interest income
6 a Ordinary dividends
6 b Qualified dividends
7 Royalties
8 Net short-term capital gain (loss)
9 a Net long-term capital gain (loss)
9 b Collectibles (28%) gain (loss)
9c
10
11
12
13
Unrecaptured section 1250 gain
Net section 1231 gain (loss)
Schedule E, line 28, column (j)
Form 1040, line 8a
Form 1040, line 9a
Form 1040, line 9b
Schedule E, line 3b
Schedule D, line 5
Schedule D, line 12
28% Rate Gain Worksheet, line
4 (Schedule D Instructions)
See the Partner’s Instructions
See the Partner’s Instructions
Other income (loss)
Code
A Other portfolio income (loss)
B Involuntary conversions
C Section 1256 contracts and straddles
D Mining exploration costs recapture
E Cancellation of debt
F Other income (loss)
Section 179 deduction
Other deductions
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
Cash contributions (50%)
Cash contributions (30%)
Noncash contributions (50%)
Noncash contributions (30%)
Capital gain property to a 50%
organization (30%)
Capital gain property (20%)
Contributions (100%)
Investment interest expense
Deductions ' royalty income
Section 59(e)(2) expenditures
See the Partner’s Instructions
See the Partner’s Instructions
Form 6781, line 1
See Pub 535
Form 1040, line 21 or Form 982
See the Partner’s Instructions
See the Partner’s Instructions
17
See the Partner’s
Instructions
Form 4952, line 1
Schedule E, line 19
See the Partner’s Instructions
19 A Cash distributed
Deductions ' portfolio (2% floor)
Schedule A, line 23
19
B or(other)
C Other property
Deductions
' portfolio
Schedule A,distributed
line 28
Amounts paid for medical
insurance
Schedule A, line 1 or
Form 1040,
line 29 of cash
If property distributed
in lieu
Educational assistance benefits
See the Partner’s Instructions
and
cash was available,
consider
Dependent
care benefits
Form 2441,
line 12
Preproductive period expenses
See the Partner’s Instructions
counting
it
as
cashflow.
Commercial revitalization deduction from
A
B
C
19
20
C
D
E
F
Form 1040, line 8b
See the Partner’s Instructions
See the Partner’s Instructions
See the Partner’s
Instructions
C
Other property
Other information
A Investment income
Net earnings (loss) from self-employment
Schedule SE, Section A or B
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
X
Y
Form 4952, line 4a
Investment expenses
Fuel tax credit information
Qualified rehabilitation expenditures (other than
rental real estate)
Form 4952, line 5
Form 4136
Basis of energy property
Recapture of low-income housing credit (section
42(j)(5))
Recapture of low-income housing credit (other)
Recapture of investment credit
See the Partner’s Instructions
Recapture of other credits
Look-back interest ' completed
long-term contracts
Look-back interest ' income
forecast method
Dispositions of property with
section 179 deductions
Recapture of section 179 deduction
See the Partner’s Instructions
Form 8611, line 8
Form 8611, line 8
Form 4255
See the Partner’s Instructions
See Form 8697
See Form 8866
Interest expense for corporate partners
Section 453(l)(3) information
Section 453A(c) information
Section 1260(b) information
Interest allocable to production expenditures
CCF nonqualified withdrawals
Depletion information ' oil and gas
See the Partner’s
Instructions
Amortization of reforestation costs
Unrelated business taxable income
Precontribution gain (loss)
Section 108(i) information
Other information
PTPA0312
 Linda Keith CPA, Inc. February 2012
See the Partner’s
Instructions and
the Instructions for
Form 6251
Depletion (other than oil & gas)
Oil, gas, & geothermal ' gross income
Oil, gas, & geothermal ' deductions
Tax-exempt interest income
Other tax-exempt income
Nondeductible expenses
Distributions
A Cash and marketable securities
B Distribution subject to section 737
E
F
Form 1040, line 71; check box a
See the Partner’s Instructions
Form 1116, Part I
A
B
C
See Form 8903 Instructions
Form 8903, line 7b
Form 8903, line 17
See the Partner’s Instructions
Other rental credits
Undistributed capital gains credit
Alcohol and cellulosic biofuel fuels credit
See the Partner’s Instructions
Other AMT items
Tax-exempt income and nondeductible expenses
Domestic production activities information
Qualified production activities income
Employer’s Form W-2 wages
Other deductions
See the Partner’s
Instructions
Form 1040, line 62
Alternative minimum tax (AMT) items
A Post-1986 depreciation adjustment
B Adjusted gain or loss
B
C
D
See the Partner’s Instructions
See the Partner’s Instructions
Credit for employer social security and
Medicare taxes
Backup withholding
C Gross income sourced at partner level
Foreign gross income sourced at partnership level
D Passive category
E General category
Form 1116, Part I
F Other
Deductions allocated and apportioned at partner level
G Interest expense
Form 1116, Part I
H Other
Form 1116, Part I
Deductions allocated and apportioned at partnership level to
foreign source income
I Passive category
J General category
Form 1116, Part I
K Other
Other information
L Total foreign taxes paid
Form 1116, Part II
M Total foreign taxes accrued
Form 1116, Part II
N Reduction in taxes available for credit
Form 1116, line 12
O Foreign trading gross receipts
Form 8873
P Extraterritorial income exclusion
Form 8873
Q Other foreign transactions
See the Partner’s Instructions
See Form 8582 Instructions
See the Partner’s Instructions
See the Partner’s Instructions
Gross farming or fishing income
Gross non-farm income
Credits
A Low-income housing credit (section 42(j)(5))
from pre-2008 buildings
B Low-income housing credit (other) from
pre-2008 buildings
C Low-income housing credit (section 42(j)(5))
from post-2007 buildings
D Low-income housing credit (other) from
post-2007 buildings
E Qualified rehabilitation expenditures (rental
real estate)
F Other rental real estate credits
G
H
I
18
See the Partner’s
Instructions
Other credits
Foreign transactions
A Name of country or U.S. possession
B Gross income from all sources
rental real estate activities
Pensions and IRAs
Reforestation expense deduction
14 Self-employment earnings (loss)
Note. If you have a section 179 deduction or any partner-level deductions, see the
Partner’s Instructions before completing Schedule SE.
15
16
employment credit
Credit for increasing research activities
08/18/11
Schedule K-1 (Form 1065) 2011
PC/V1
Section 3: Partnerships
LINDA KEITH, CPA
Form 4562 Depreciation
Form
4562
Depreciation and Amortization
Department of the Treasury
Internal Revenue Service (99)
separate instructions.
Name(s) shown on return
Part I
1
2
3
4
5
OMB No. 1545-0172
▶ Attach
Attachment
Sequence No. 179
to your tax return.
Identifying number
Business or activity to which this form relates
Election To Expense Certain Property Under Section 179
Note: If you have any listed property, complete Part V before you complete Part I.
Maximum amount (see instructions) . . . . . . . . . . . . . . . . . .
Total cost of section 179 property placed in service (see instructions)
. . . . . .
Threshold cost of section 179 property before reduction in limitation (see instructions) .
Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0- . . . . .
Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If
separately, see instructions . . . . . . . . . . . . . . . . . . . .
6
2011
(Including Information on Listed Property)
▶ See
(a) Description of property
(b) Cost (business use only)
. . .
. . .
. . .
. . .
married
. . .
. .
. .
. .
. .
filing
. .
5
8
9
10
11
12
Goes to Sch K
Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.)
14 Special depreciation allowance for qualified property (other than listed property) placed in service
during the tax year (see instructions) . . . . . . . . . . . . . . . . . . . . . .
15 Property subject to section 168(f)(1) election .
16 Other depreciation (including ACRS) . . .
Part III
1
2
3
4
(c) Elected cost
7 Listed property. Enter the amount from line 29 . . . . . . . . .
7
8 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7
. . . . . .
9 Tentative deduction. Enter the smaller of line 5 or line 8 . . . . . . . . . . . . . . . .
10 Carryover of disallowed deduction from line 13 of your 2010 Form 4562 . . . . . . . . . . .
11 Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions)
12 Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 11
. . . . .
13
13 Carryover of disallowed deduction to 2012. Add lines 9 and 10, less line 12 ▶
Note: Do not use Part II or Part III below for listed property. Instead, use Part V.
Part II
3-25
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
14
15
16
MACRS Depreciation (Do not include listed property.) (See instructions.)
Section A
17
17 MACRS deductions for assets placed in service in tax years beginning before 2011 . . . . . . .
18 If you are electing to group any assets placed in service during the tax year into one or more general
asset accounts, check here . . . . . . . . . . . . . . . . . . . . ▶
Section B—Assets Placed in Service During 2011 Tax Year Using the General Depreciation System
(a) Classification of property
19a
b
c
d
e
f
g
h
(b) Month and year
placed in
service
(c) Basis for depreciation
(business/investment use
only—see instructions)
(d) Recovery
period
(e) Convention
(g) Depreciation deduction
(f) Method
3-year property
5-year property
7-year property
10-year property
15-year property
20-year property
25-year property
25 yrs.
S/L
Residential rental
27.5 yrs.
MM
S/L
property
27.5 yrs.
MM
S/L
Nonresidential real
39 yrs.
MM
S/L
property
MM
S/L
Section C—Assets Placed in Service During 2011 Tax Year Using the Alternative Depreciation System
S/L
Class life
12 yrs.
S/L
12-year
40 yrs.
MM
S/L
40-year
i
20a
b
c
Part IV Summary (See instructions.)
21 Listed property. Enter amount from line 28 . . . . . . . . . . . . . . . . . . . .
22 Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21. Enter here
and on the appropriate lines of your return. Partnerships and S corporations—see instructions
23 For assets shown above and placed in service during the current year, enter the
portion of the basis attributable to section 263A costs
. . . . . . .
For Paperwork Reduction Act Notice, see separate instructions.
PC/V1
.
.
.
.
.
21
22
Goes to Pg 1
23
Cat. No. 12906N
Form 4562 (2011)
 Linda Keith CPA, Inc. February 2012
3-26
Section 3: Partnerships
BEYOND THE 1040
Form
8825
(Rev. December 2010)
Form 8825 Rentals
Rental Real Estate Income and Expenses of a
Partnership or an S Corporation
instructions on back.
▶ Attach to Form 1065, Form 1065-B, or Form 1120S.
Employer identification number
Name
1
OMB No. 1545-1186
▶ See
Department of the Treasury
Internal Revenue Service
Show the type and address of each property. For each rental real estate property listed, report the number of days rented at fair
rental value and days with personal use. See instructions. See page 2 to list additional properties.
Physical address of each property—street, city, Type—Enter code 1-8;
Fair Rental Days
Personal Use Days
state, ZIP code
see page 2 for list
A
B
C
D
Properties
Rental Real Estate Income
2 Gross rents . . . . . .
3
4
5
6
7
8
9
10
11
12
13
14
15
A
.
Rental Real Estate Expenses
Advertising . . . . . . .
Auto and travel
. . . . .
Cleaning and maintenance . .
Commissions . . . . . .
Insurance . . . . . . .
Legal and other professional fees
Interest . . . . . . . .
Repairs . . . . . . . .
Taxes
. . . . . . . .
Utilities . . . . . . . .
Wages and salaries . . . .
Depreciation (see instructions)
Other (list) ▶
B
C
D
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16 Total expenses for each property.
Add lines 3 through 15 . . .
17 Income or (Loss) from each
property. Subtract line 16 from line 2
16
17
18a Total gross rents. Add gross rents from line 2, columns A through H . . . . . . . . . .
b Total expenses. Add total expenses from line 16, columns A through H . . . . . . . . .
19 Net gain (loss) from Form 4797, Part II, line 17, from the disposition of property from rental real
estate activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
20a Net income (loss) from rental real estate activities from partnerships, estates, and trusts in which
this partnership or S corporation is a partner or beneficiary (from Schedule K-1) . . . . . .
18a
18b (
)
19
20a
b Identify below the partnerships, estates, or trusts from which net income (loss) is shown on line 20a.
Attach a schedule if more space is needed:
(1) Name
21
(2) Employer identification number
Net rental estate income (loss). Combine lines 18a through 20a. Enter the result here and on:
• Form 1065 or 1120S: Schedule K, line 2, or
• Form 1065-B: Part I, line 4
For Paperwork Reduction Act Notice, see back of form.
 Linda Keith CPA, Inc. February 2012
Cat. No. 10136Z
21
Form 8825 (12-2010)
PC/V1
Section 3: Partnerships
Form 8825 Rental Real Estate
LINDA KEITH, CPA
The Form 8825 feeds into the Schedule K
and will be attached to a partnership or
S corporation return. Cashflow this form
just like you would a Schedule E in a personal 1040.
Include the rental cashflow on the ‘Miscellaneous...from Schedule K’ line of the
partnership/ S corporation worksheet.
Caution: In some cases the preparer
might have included rental depreciation
on Page 1. Don’t add it back twice.
See 1065 Page 1, Line 16b on page 3-12.
If it is blank, then it is safe to add back the
rental depreciation.
PC/V1
 Linda Keith CPA, Inc. February 2012
3-27
3-28
Section 3: Partnerships
BEYOND THE 1040
Supporting Schedules
Bailey Drug Store 93-0000000
1
Form 1065, Line 7
Other income (loss)
Video rental income
Liquor
Miscellaneous
50,742.
17,498.
15,257.
Total
83,497.
Form 1065, Line 20
Other deductions
Advertising
Bank Credit Card Fee
Utilities
Insurance
Supplies
Legal/Acctg
Contracted Services
Equip. rental & maintenance
Dues/Subscriptions
Cleaning/main
Postage
Cash short
Misc
Delivery/auto
Bank Service charge
NSF Checks
Bailey
Drug
Store 93-0000000
Vendor
Service
Charges
Travel
Form 1065, Schedule L, Line 13
Other
Total Assets
38,308.
21,246.
12,798.
13,300.
7,650.
6,098.
5,888.
5,072.
4,542.
4,238.
3,142.
2,508.
2,350.
2,300.
1,902.
1,411.
1,176.
959.
If nondeducted
meals, be sure to
‘visit’ Schedule M-1
for other nondeducted items. We
are not there yet.
2
134,888.
Beginning of
tax year
Other
Assets:
Form 1065,
Schedule M-1, Line 6
Sch M-1, Line 6
Deposits
1,100.
Insurance proceeds
7,800.
Total
7,800.
Total
Always look for
noncash and nonrecurring expenses
to add back. Also
consider if insurance is adequate.
End of
tax year
2,137.
Add if (recurring)
1,100.
cash received.2,137.
Form 1065, Schedule L, Line 17
Other
Current
Liabilities
Form 1065,
Schedule
L, Line 6
Other Current Assets
Other Current Liabilities:
Other Current Assets:
Payroll taxes payable
Line
of Credit
Miscellaneous
Total
Total
 Linda Keith CPA, Inc. February 2012
Form 1065, Schedule L, Line 20
Other Liabilities
Beginning of
tax year of
Beginning
tax year
5,519.
12,043.
24,567.
17,562.
24,567.
End of
tax
year
End
of
tax year
5,519.
11,176.
22,017.
16,695.
22,017.
PC/V1
Section 3: Partnerships
Supporting Schedules
LINDA KEITH, CPA
Whenever a line in a tax return simply says
(attach schedule) the information you
need will be in the back of the tax return
after all of the formal IRS schedules.
Some software numbers these, some
use letters and others, like mine, simply
refer back to the Form, Schedule and Line
number.
They are generally in the same order you
run across them in the return itself.
Form 1065, Schedule A (2010) or 1125-A
(2011) Cost of Goods Sold
Other costs, Line 5
Form 1065, Page One, Line 7
Other Income (loss)
Form 1065, Schedule M-1 Reconciliation
Nontaxed Income, Line 6
This is a great example of a company that
uses the other income line, not for unusual
items, but just for different categories
of income. As long as it is typical for the
business, you don’t need to be concerned
with it.
The $15,257, if it was not also on the
second year return, might need some
explanation to leave it in.
I made no adjustments for this.
Form 1065, Page One, Line 20
Other Deductions
Review this schedule to be sure they
have adequate insurance. If so, make no
adjustment. If not, check for insurance on
a supporting schedule to Schedule A, Cost
of Goods sold, Line 5. A lack of adequate
insurance is a red flag.
Also check here for nonrecurring
expenses or amortization you can add
back to ordinary income.
How to find nonrecurring items?
Sometimes it is obvious by the name, such
as disaster repairs. Otherwise, compare to
another year’s return.
All of these expenses looked like they
could be typical for a drug store and there
was no amortization listed. They do have
insurance. Therefore, I made no additional
adjustments because of this.
PC/V1
Bailey Drug Store did not have Other
Costs on the COGS schedule. When it is
there, sometimes it includes insurance.
If the insurance coverage elsewhere in
the return looks too low, check here. For
example, insurance on a warehouse where
inventory is stored would be back here.
The $7,800 was income on the books and
not on the tax return. Therefore, if it is
cash received (recurring cash received if
projecting cashflow) we need to add it to
cashflow.
Insurance proceeds does not sound
like recurring cashflow to me. If you are
digging for dollars and $7,800 will make a
difference, reconsider.
For example, what if the insurance
proceeds are to offset additional expenses
they have shown elsewhere in the return
due to a claim? Then it would be your clue
to add back the nonrecurring, unusual
expenditures.
I did not add the $7,800 insurance
proceeds to cashflow.
Form 1065, Schedule L Balance Sheet
Other Current Liabilities, Line 17
If any outstanding balance of a
Commercial Line of Credit is on this line,
you can be more confident in using
Schedule L, Line 16 for principal on term
debt due in the next twelve months. This is
a shortcut when you do not have detailed
debt info. See page 3-13 for the shortcut.
 Linda Keith CPA, Inc. February 2012
3-29
3-30
Section 3: Partnerships
BEYOND THE 1040
 Linda Keith CPA, Inc. February 2012
PC/V1