Discussion:LLC Distributions-Help
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> LLC Distributions-Help
Michaelmac1 (talk|edits) said: | 19 January 2007 |
| I have been asked by a potential investor in a new LLC as to the impact of distributions which are in excess of their original investment. My accountant is out of town and I want to get back to this person asap.
My thinking is that if the distribution is made after a year it will be subject to capital gains rate. However,it was implied that this may not be the case. If not is there anything the LLC can do to limit/offset the tax impact on these distributions? | |
Michaelmac1 (talk|edits) said: | 19 January 2007 |
| Any help ismost appreciated..thank you! | |
Laura of NY (talk|edits) said: | 19 January 2007 |
| Assuming the LLC has multiple owners and will be taxed as partnership on a personal level, your investor's basis will change every year depending on the distributions received and the taxable income allocated to him based on his ownership %. To keep it very simple,his taxable basis each year will increase by the amount of taxable income allocated to him less any distributions taken. That is the simplest of situations. It get more complicated if - in the case of a new business - there are losss for the first couple of years. Is he actually going to be a partner in the busines? Are there guaranteed payments? There are alot of variables that would be better answered by your local people who know the entire background of the deal. | |
| 19 January 2007 | |
| Distributions in excess of the members tax basis (not original investment) would be taxable as a capital gain.....long-term if investment is held greater than one year. See Laura's explanation of tax basis. | |
Michaelmac1 (talk|edits) said: | 19 January 2007 |
| The LLC will have multiple members but will be taxed as a Corporation. If we keep it simple, he is not a partner but a passive investor, (the partners will get guaranteed payments), his investment is $100, he is allocted $10 of taxable income in Year 2 but is distributed $150 in Year 2 also, what are the tax implications and relevant tax rates? Thanks a ton for your help! | |
| 19 January 2007 | |
| If you are being taxed as a Corporation, there is no allocations of income. If you are taxed as a SCORP, then there is. As for guaranteed payments, those are for partnerships only and you don't use that method for CCORP / SCORP.
If you are a file 1065, you are a partnership and should check into Section 704 on how to maintina capital accounts for each partner. For the rest of the Questions, you should consult a local CPA. In general. Y1: $10 allocation will flow through the partner's 1040 via K-1 Increases Capital Account to $110.00 Y2: Distribution (assumed Cash) of $150 may be / may not be / partially taxable depending on the Partner's Outside Basis. | |
