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LLC Tax Distributions

Mark Dudley's Profile

LLC Distribution Tax Rate VariablesI work for an LLC that is looking to make partnerhip distributions to it's members to cover their tax liability from the LLC's income (this is okay per the Operating Agreement).  How should this transaction be accounted for?  Out of equity or as an expense?

Answers

Vikram Malkani
Title: Managing Principal
Company: Malkani Advisory
(Managing Principal, Malkani Advisory) |

This is return of equity and reduces members' capital balances

Mark Dudley
Title: Controller
Company: SalonQuest LLC
(Controller, SalonQuest LLC) |

That I what I thought, but I wanted to make sure. Thanks.

Andrew Ells
Title: Finance Manager
Company: Fitness EM, LLC
(Finance Manager, Fitness EM, LLC) |

How are you calculating your distributions?

What we do to calculate the distribution is use the K-1's and Add back interest Income and subtract Section 179 deductions.

Vikram Malkani
Title: Managing Principal
Company: Malkani Advisory
(Managing Principal, Malkani Advisory) |

When making a distribution to cover tax liabilities (operating agreements typically call for a distribution in such cases) it is usually calculated by applying the highest Federal tax rate to the taxable income attributable to members (some operating agreements include this as well).

Ken Kaufman
Title: CFO
Company: Community Dental Partners
LinkedIn Profile
(CFO, Community Dental Partners) |

Vikram,

I like your approach of using the highest Federal tax rate to the taxable income. Since the LLC is almost always taxed as a flow-through entity, the effective tax rates differ among each member. Using the highest federal tax rate for individuals is a fair way to approach this. It does not, however, account for state income tax. If members are in more than one state, then this causes more variability to the actual tax rate. Pick a rate for everyone and distribute accordingly.

Vikram Malkani
Title: Managing Principal
Company: Malkani Advisory
(Managing Principal, Malkani Advisory) |

Hi Ken,
It's exactly for the reason you say, tax rates differ for every member, so pick a rate and distribute to everybody based on that rate. Highest Federal tax rate seems to be the most common for good practical reasons. Good luck!

Robert Holland
Title:
Company:
(, ) |

First if a distribution and treated as a return of equity then their is no tax treatment shorterm. Only upon liquidation or member leaving will tax basis be affected.

I still am under the thought that if member paid in 1,000 to later shortly receive 1,500 that there would be a capital gain distribution.

Perhaps author can restate question for thought.
Return of capital does not have a tax affect on pass-through until member leaves or liquidation.

Topic Expert
Rick Bigelow
Title: C0O
Company: LSSM
(C0O, LSSM) |

I too would like clarification on the taxaxtion on the distributions. I am part of a group that just purchased a small company and a distribution to the shareholders is planned for early April. I am not sure all tax issues have been considered. Let's take one shareholder for example. They put in $336k and own roughly 37% of the company. They will receive a $37k distribution in April. Not knowing their respective tax bracket, and seeing that the distributions have not exceeded the initial $336k investment, what are the tax liabilities due, if any?

Wray Rives
Title: CPA CGMA
Company: Rives CPA PLLC
(CPA CGMA, Rives CPA PLLC) |

The tax is not really dependent on the balance of capital or loan accounts, but rather is determined by the earnings of the LLC and the form they have chosen for federal tax purposes. LLC's are generally taxed as either sole proprietorships, partnerships or S-corp, in all three forms any taxable income is passed through to the LLC members when it is earned. Generally the timing of member distributions will not impact income tax liability.

George Schaefer
Title: CFO
Company: Soltage, LLC
(CFO, Soltage, LLC) |

I work for a LLC and according to the underlying agreement all distributions are treated as a return of capital until the partners account reach zero, so there is no tax consequence.
After that they are treated witht he highest then applicable tax rate.

Vikram Malkani
Title: Managing Principal
Company: Malkani Advisory
(Managing Principal, Malkani Advisory) |

Wray Rives is absolutely right. The operating agreement may determine capital balances between members for a variety of internal reasons, including allocation of profits between them, but tax allocation to members is independent of distributions.

Michael Liccardo
Title: Interim CFO/VP Corp Dev
Company: Pandesa
(Interim CFO/VP Corp Dev, Pandesa) |

If the LLC distribution is greater than the member's contributed capital is the difference treated as capital gain?

Wray Rives
Title: CPA CGMA
Company: Rives CPA PLLC
(CPA CGMA, Rives CPA PLLC) |

Assuming this is an LLC taxed as a partnership, then distributions of cash or marketable securities in excess of the partner's basis is a capital gain to the LLC shareholder. Distribution of other appreciated assets is not a capital gain until the partner(shareholder) disposes of the assets.

Kirill B
Title: Finance Manager
Company: TheBroth Inc
(Finance Manager, TheBroth Inc) |

At the risk of repeating already answered question, the members of the LLC (treated as a partnership for tax purposes) are free to inject capital (say, their own personal savings) and withdraw that same amount of capital at any time for working capital capital needs or take advantage of growth opportunity? With no income/capital gains tax consequences? Is it different under AZ state law? Thank you!

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