Since 2001, we provide tax expertise & strategies for: Corporations, Partnerships, LLCs & Trusts.
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Are Partnership/LLC Distributions Taxable?
Partnership or LLC Distributions may be taxable to the partners or LLC members.
Distribution of partnership assets can be done as either current distribution or liquidating distribution. A current distribution is when a partnership makes a distribution to the partner(s). The receiving partner’s capital interest is retained fully or partially (IRC Sec. 761(d)). Even if the distribution reduces partner’s interest in the LLC from 80% to 2%, this distribution will be considered current. A liquidating distribution is when partner’s entire interest in the partnership/LLC is completely liquidated.
Distribution can consist of cash, property, or combination of both. If partnership makes a distribution in excess of partner’s basis in the partnership/LLC, a taxable event may take place.
Example: David and Daniel are 50/50 partners in ABC LLC. David contributed $10,000 cash and Daniel contributed $5,000 cash to the LLC. At the end of the first tax year, the ABC LLC has generated $4,000 in profits. ABC LLC distributes $8,000 cash to each partner.
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David’s distribution is not taxable:
$10,000 initial capital contribution
add $2,000 (50% LLC profit)
$12,000 basis (capital)
Less $8,000 cash distribution
David’s basis in partnership interest after the distribution is $4,000.
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Daniel’s distribution is taxable:
$5,000 initial capital contribution
add $2,000 (50% LLC profit)
$7,000 basis (capital)
Less $8,000 cash distribution
Daniel’s basis in partnership interest after the distribution is -$1,000. However, basis cannot be below “0”, therefore $1,000 is the excess (7K basis-8K distribution) which is taxable to Daniel.
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Important Tax Disclosure
IRS Circular 230 Legend: Any advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax payments or penalties. Unless otherwise specifically indicated, you should assume that any statement in this website or articles that relating to any U.S. federal, state, or local tax matter was written in connection with the promotion or marketing. Disclaimer: Any articles herein is designed for general information only. The information presented at this site should not be construed to be formal legal or tax advice. Each taxpayer should seek advice based on the taxpayer's particular circumstances.
IRS Circular 230 Legend: Any advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax payments or penalties. Unless otherwise specifically indicated, you should assume that any statement in this website or articles that relating to any U.S. federal, state, or local tax matter was written in connection with the promotion or marketing. Disclaimer: Any articles herein is designed for general information only. The information presented at this site should not be construed to be formal legal or tax advice. Each taxpayer should seek advice based on the taxpayer's particular circumstances.
