A question came in from an analyst that sounds like a fine detail but has real loan decision implications: should I treat cash distributions differently from property distributions on the K-1?

The short answer is: it depends on the entity type, and on whether the difference is even visible to you. Senior Credit Trainer David Stauffacher and I worked through both in a recent livestream. Here is what you need to know.

Start With Your Guidelines

Before anything else, check your institution's guidelines. Most financial institutions have defined procedures that will tell you exactly which line and code to use for distributions, and the answer is usually:

For a 1065 (partnership or multi-member LLC): use Line 19, Code A from the K-1. That is cash distributions only. Note that before 2025, the 1065 K-1 codes differed.

For a 1120S (S-corp): use Line 16, Code D from the K-1. That is distributions affecting shareholder basis, and here is the catch: cash and property are combined on that line.

So the difference is not just conceptual. It is structural. On a 1065, the form separates cash (Code A) from property (Code C), so you can see exactly what you are working with. On a 1120S, those two things are reported together, and you may not be able to tell them apart.

When Property Shows Up on a 1065

On a 1065, you can see both. So what do you do when a partner takes property instead of cash in a given year?

Start with context. If a partner typically receives $30,000 in cash distributions and one year they take a truck instead because the entity no longer needs it, ask yourself: could they have taken cash? Was the liquidity there? Was this a preference, not a necessity?

If the answer is yes, the property distribution was simply a substitute for cash the entity could have paid. In that case, there is a reasonable argument for counting it. Declining a performing loan because an owner took a piece of equipment instead of a check, when the cash was available to pay it, is not a good outcome for anyone.

On the other hand, if cash distributions were $30,000 in most years and this year you see $30,000 cash plus $50,000 in property, that extra $50,000 warrants more scrutiny. That is not a substitution. That is an addition, and you should understand what it represents before you count it.

To work through this properly, you will need the full entity return. The balance sheet will tell you whether the liquidity was there to support a cash distribution in that amount. The cash flow will tell you if they generated enough income during the year to support distributions. That is the data point that anchors the judgment call.

The S-Corp Problem

On the 1120S, you simply cannot see the breakdown. Cash and property are on the same line of the K-1. You will not know what portion was cash and what portion was property, and there is no workaround for that.

This creates a situation that comes up throughout K-1 analysis: you have information about one borrower that you do not have about another borrower who may be in a nearly identical situation, just because of the form they filed. The IRS is not designing these forms to be helpful to lenders. They are designing them for tax reporting purposes, and the two goals do not always align.

The Question Worth Asking at Your Institution

If you are responsible for underwriting guidelines, this is worth a conversation. Most guidelines simply say "1065, Line 19, Code A" and leave it there. They may not address Code C at all, which means your lenders may not even be looking for it, and they may not know to flag a year where property distributions created a significant difference.

That does not mean you need to rewrite every worksheet to add Code A plus Code C. For most borrowers, property distributions are infrequent and the dollar amounts are not material enough to change the loan decision. But if a lender notices a meaningful swing in distribution income from one year to the next, knowing that property distributions on a 1065 are on a separate line is useful context. The apparent drop might not be a real drop at all.

The goal is always the same: make sure you are not walking away from a good loan because you missed something, and make sure you are not approving a weaker credit because you counted something you should not have.

The Bottom Line

Treat cash and property distributions differently when the form lets you see the difference and when the difference is material to the loan decision. On a 1065, you have the visibility. On an 1120S, you do not, and that is a limitation you have to acknowledge rather than try to work around.

When property shows up, ask whether it was a substitute for cash the entity could have paid or an additional distribution outside the normal pattern. The balance sheet will help you answer that.

And if you are seeing this come up in your portfolio, it is worth a quick conversation with your team about how your guidelines address it.