How is income on a K-1 Schedule from the tax returns treated?

Refer to Appendix Q, H. Income Analysis: Partnership Tax Returns (IRS Form 1065)

otherwise known as Schedule K-1.

We currently obtain K-1s but never collect that specific tax return when the ownership interest is modest. So, under ATR, we will need to require the 1040 as evidence of stability and continuity? We have clients who have 5% ownership positions in 50 or more LLC’s and receive small distributions. It seems crazy to obtain all of those tax returns to support the small income on the K-1s? We currently analyze the K-1’s to determine the actual cash distributions/contributions and their effect on the individual’s cash flow. It would seem ATR requires full copies of the tax returns if we are going to use that income, right? The K-1 alone is insufficient?

Sure looks that way based on Appendix Q.

That's what I'm thinking - thanks for the feedback!

If you are trying to meet QM standards and Appendix Q, you are correct in needing all documentation.

If you are trying to meet the basic 8 factor test for Ability to Repay, not rising to the level of a QM, then you may be able to forgo some documetnation based on other verified information. You do not have to meet Appendix Q to satisfy only the ATR test.