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Taxtom
Taxtom, Accountant
Category: Finance
Satisfied Customers: 2340
Experience:  25 Years in preparing Personal and Business Tax Retuns
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I am a small business owner. My question is if I can take a

Customer Question

I am a small business owner. My question is if I can take a distribution from the business even if we didn't make a profit this year. What are the effects of that?
Submitted: 3 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 3 years ago.

Dear Friend,

 

From what I can gather from your question, if your take distribution from your business even when there is no profit, technically, either you would be reducing the "Retained Earnings" or in absence of that you would be depleting the capital.

 

I hope this helps...

Warm Regards,

Customer: replied 3 years ago.
Yes, I understand that much but what does that eventually do tax wise? I have been told it effects the taxable basis of our stock so what would that mean?
Expert:  Rakhi Vasavada replied 3 years ago.

Dear Friend,

 

Yes, that is correct. Tax basis is the original value of an asset for tax purposes (usually the purchase price), adjusted for stock splits, dividends and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset's cost basis and the current market value.

 

I hope this helps...

Regards,

 

Customer: replied 3 years ago.

so can I get an example? We paid $225,000 for 1/2 ownership of a business. Over the years, we have had distributions due to making a profit each year. Let's say 50,000 each year for 4 years. Last year we did not make a profit, in fact we had a $2000 loss but we still took a 10,000 distribution. What effect does that have on my basis?

Expert:  Rakhi Vasavada replied 3 years ago.

Dear Friend,

 

It would reduce your stock basis by $10,000.

Regards,

Customer: replied 3 years ago.
So is there really no tax consequences until we would decide to sell our business? Do you pay capital gains on the difference of your tax basis and sale price? Is that where it comes in to play?
Expert:  Rakhi Vasavada replied 3 years ago.

Dear Friend,

 

I had become engaged in this question, as I took this as an probable effect of taking distribution even when there is a loss with probable effect on accounting and balance sheet. However, this is becoming a matter of tax expertize and therefore, I would opt out in your best interest so that other expert can assist you in better way. Hope to assist you in future..

Warm Regards,

 

Customer: replied 3 years ago.
ok. has this been forwarded to someone then?
Expert:  Taxtom replied 3 years ago.
Hello, What is your form of business? Corporation or do you file a Schedule C with your 1040. Thanks Tom
Customer: replied 3 years ago.
Corp. We have a K-1 filing.
Expert:  Taxtom replied 3 years ago.
Hello, Yes you can take a distribution even if you didn't make a profit. Since you are a type of LLC you either take it out of your equity account or if your equity account is zero or below you can record it has a loan. Thanks Tom
Customer: replied 3 years ago.
So what are the short or long term consequences of doing so?
Expert:  Taxtom replied 3 years ago.
Hello, Do you have a positive balance in your equity account? Tom
Customer: replied 3 years ago.
Yes.
Expert:  Taxtom replied 3 years ago.
Hello, If you have enough in your equity account then you only taking money out that you either invester earlier or from past years profits that you have already been taxed on. Tom
Customer: replied 3 years ago.
So would it be true to say as long as we have enough in our equity account for the distribution. It would not have an effect on our tax basis?
Expert:  Taxtom replied 3 years ago.
Exactly, it is money that was reported on previous years K-1's and has already been taxed. Tom
Taxtom, Accountant
Category: Finance
Satisfied Customers: 2340
Experience: 25 Years in preparing Personal and Business Tax Retuns
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