What a K-1 tells the lender
A K-1 reports pass-through income or loss from a partnership or S corporation. The lender may need to understand the ownership percentage, business structure, income trend, distributions and whether the borrower can actually access the earnings being used to qualify.
Simple example
Assume a borrower owns 40% of a business and the K-1 reports $150,000 of income. That does not automatically mean the lender will use $12,500 per month. The analysis may also need to address actual distributions and the financial strength of the business.
Distributions vs. K-1 income
Taxable pass-through income and cash distributed to the owner are different concepts. A business can report income to an owner while retaining cash for payroll, inventory, taxes, equipment, debt or working capital.
Partnership K-1 vs. S-Corp K-1
Partnerships and S corporations use different tax forms and can produce different income components. The lender's analysis should match the actual entity rather than treating every K-1 the same.
What documents may be needed?
- Personal tax returns
- Business tax returns when required
- Schedule K-1
- Documentation of distributions when relevant
- Current P&L or balance sheet when required
- Proof of ownership
- Other documents needed to evaluate business liquidity