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Q1. Does that mean our basis in the partnership is zero?
Yes, it means your tax basis in the partnership is zero presuming there are no partnership liabilities.
Currently the LLC is around break even and there is enough cash flow to pay ourselves around 3k per month each....Is this 3k taxable?
If this is taken as a guaranteed payment than it will be taxable and reported as guaranteed payment on the K-1. It will also be subject to self employment tax on your personal tax return.
If this is a draw(distribution) against profit than the income or loss will flow through to you via K-1 and be subject to tax on your personal tax return.
Or do you just wait to see at the end of the year what the ordinary business income is on the K1 to see how much tax to pay?
You do not have to wait until the end of the year. Tax in either case will be due on your personal tax return.
What if the LLC shows a loss again? Can I have a negative basis and offset the loss against income?
If the LLC shows a loss again than you may not be able to use the loss since you do not have a tax basis.
If you take a distribution in excess of basis (since you do not have a tax basis) than this would be taxable as capital gain to the partner.
see section 731 in the link below for detailed info-
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.
Yes, distribution or draw is the profit that you are taking out of the business.
Yes, but you already used that $60K(in the form of loss) to offset your income so you do not have that basis in the partnership.
To explain this say you were a sole proprietor had invested $60K in your business and lost everything. You would get a loss offset of $60K. You cannot pay that to yourself as tax free payment when you make profit and say that it is return of investment in the business since the investment was already written off in earlier year.
If the business makes another loss than you cannot use that loss to offset your other income as you do not have any tax basis in the partnership. This loss will be carried forward and allowed in the year you have a tax basis.
If you take the draw and you do not have profit and/or basis to cover the draw than this is draw in excess of basis and taxed as capital gain. Generally if you have held the partnership interest over a year than this will be taxed as long term capital gain upto a maximum of 15% for federal and CA State tax will depend on your overall tax bracket.
Yes, that is correct- draws from LLC in excess of the basis that you have in the partnership will be taxed as long term capital gains upto maximum of 15% and State tax.
Btw, what will the source of funds be - if the LLC is suffering losses?
Your taking a draw does not generate a loss as draw is not a deductible expense.
If after accounting for your income and expense you have a profit than this would be taxed at regular income tax bracket.
Hope this helps.
If you have profit than you are taxed on the profit that flows via the K-1 to your personal tax return. Draw that you take out of this profit is not taxable to you. If you do not have a tax basis and profit than the distribution in excess of basis will be taxed as capital gain.
Attached is the link with detail info from tax regulations-