We frequently receive questions on the Bukers Hotline about spreading and properly analyzing K-1s received by individual borrowers, including this most recent question about an “Other Increase” that deserves to be highlighted.

This caller was analyzing a borrower’s K-1 from an S-corporation and the caller found a shareholder’s basis worksheet attached to the K-1. One of our recent newsletter articles discussed how a shareholder’s basis worksheet may be included with an S-corporation K-1 and can provide important insight about your borrower’s cash flow related to their S-corporation ownership (click here to read the article). The worksheet and K-1 reported an “Other Increase” of roughly $250,000.  How can we tell if this item represented a cash inflow for the borrower?

The corresponding description of this “Other Increase” was “Section 1377(a)(2) election.” While the caller was hoping this item represented a cash inflow, it’s a good thing she called into the Bukers Hotline because this “Other Increase” of $250,000 was a non-cash transaction. Without diving into too much detail, a section 1377(a)(2) election means that another shareholder exited the S-corporation and this shareholder had an increase in basis because of the termination. While the existing shareholder’s basis and ownership in the S-corporation increased as part of this election, the “Other Increase” of $250,000 is simply a paper transaction reflecting the adjustment to the borrower’s basis. It does not actually reflect a cash inflow for the borrower.

When you see an “Other Increase” or “Other Decrease” to your borrower’s S-corporation or partnership basis, do not simply assume that it represents a cash inflow or cash outflow. More often than not, the adjustment is likely a paper transaction that does not reflect a cash transaction. It’s very important to use the supporting statements included with the K-1 and/or the shareholder’s basis worksheet to find out what the “Other Increase” or “Other Decrease” actually represents before including it in your cash flow analysis.

And remember, we are always here to help if you run into anything you are unsure of.  This is a free service we provide to all Bukers software users.  You can reach the Bukers Hotline at (503) 520-1303.