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Are Partnership/LLC Distributions Taxable?

TaxBizPro, LLC Posted on: August 29, 2011 11:19

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.
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.
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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