I work for an LLC that is looking to make partnerhip distributions to it's members to cover their
LLC Tax Distributions
Answers
This is return of equity and reduces members' capital balances
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That I what I thought, but I wanted to make sure. Thanks.
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.
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).
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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.
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!
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.
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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?
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.
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.
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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.
If the LLC distribution is greater than the member's contributed capital is the difference treated as capital gain?
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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.
At the
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