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RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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Help! I need to understand how to take money out of my LLC. I dont underst

Resolved Question:

I started an LLC in 2007 with 1 partner (we are being treated as a partnership)
We both paid in $60K each in 2007. Overall the LLC lost $120K in 2007. on our K1 we each showed a $60k loss, which was used to offset income.
Q1. Does that mean our basis in the partnership is zero?

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?
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?
What if the LLC shows a loss again? Can I have a negative basis and offset the loss against income?
Any help will be greatly appreciated!
Submitted: 6 years ago.
Category: Tax
Expert:  RD replied 6 years ago.

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-

 

http://www.taxalmanac.org/index.php/Sec._731

 

 

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.

 

Customer: replied 6 years ago.
Ok the distribution will be a draw against profit.
Is it not the case that we can be repaid the $60k we each put in tax free? (we already paid tax on it before we invested it in the LLC)?
Expert:  RD replied 6 years ago.

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.

 

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.

 

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.

Customer: replied 6 years ago.
Ok, at the end of the year if the business has made another loss I can't reduce my personal tax basis with the loss?

So this year if I take 3k draw per month. Will this add to my personal income and be taxed at my personal tax rate or at cap gains rate? Is that 15%? I live in california?

thanks!
Expert:  RD replied 6 years ago.

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.

 

 

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.

Customer: replied 6 years ago.
Your advice has been excellent! I just need to clarify one last point.

So as we have had the LLC (taxed as a partnership) for over 12 months and we have no basis in the company we can take a draw and be taxed at 15% cap gains plus state tax. Correct?

Therefore regardless of what my additional personal income is, draws from the LLC will be taxed as long term cap gains. Correct?

this really is my last question! Thanks
Expert:  RD replied 6 years ago.

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?

 

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.

Customer: replied 6 years ago.
We actually run an online web subscription business. If we spend heavily on marketing at the end of the year we won't realize any profitability from the new customers until we're into next year. So we will generate a loss this year. I'm trying to understand if it's better to just take a draw now at 15% and generate a loss OR take nothing now and generate Profit.....If I generate profit won't this be taxed normally under my income tax bracket?
I'm just trying to establish the best scenario....thanks for your help
Expert:  RD replied 6 years ago.

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.

 

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.

Customer: replied 6 years ago.
So will I be taxed twice on the draw? If it's not a deductible expense and I take a draw, then also show a profit aren't I being taxed on it also as income? (as it wasn't a deductible expense)
I'm really sorry to keep on. I'm just trying to get a clear picture. We are almost there I think.
Thanks so much!
Customer: replied 6 years ago.
I spoke to another who says as we're being taxed as a partnership we will not pay cap gains on the draw. We'll just pay income tax on the profit (if there is one) Which one of you is correct?
Expert:  RD replied 6 years ago.

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-

http://www.taxalmanac.org/index.php/Reg._1.731-1

 

 

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.

RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience: CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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