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I am a small business owner. My question is if I can take a

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distribution from the business even...
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: 6 years ago.Category: Finance
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2/6/2011
Financial Professional: Rakhi Vasavada, Financial and Legal Consultant replied 6 years ago
Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4,545
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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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,

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Customer reply replied 6 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?
Financial Professional: Rakhi Vasavada, Financial and Legal Consultant replied 6 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,

 

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Customer reply replied 6 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?

Financial Professional: Rakhi Vasavada, Financial and Legal Consultant replied 6 years ago

Dear Friend,

 

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

Regards,

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Customer reply replied 6 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?
Financial Professional: Rakhi Vasavada, Financial and Legal Consultant replied 6 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,

 

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Customer reply replied 6 years ago
ok. has this been forwarded to someone then?
Financial Professional: Taxtom, Accountant replied 6 years ago
Taxtom
Taxtom, Accountant
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Satisfied Customers: 2,364
Experience: 25 Years in preparing Personal and Business Tax Retuns
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Hello, What is your form of business? Corporation or do you file a Schedule C with your 1040. Thanks Tom
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Customer reply replied 6 years ago
Corp. We have a K-1 filing.
Financial Professional: Taxtom, Accountant replied 6 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
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Customer reply replied 6 years ago
So what are the short or long term consequences of doing so?
Financial Professional: Taxtom, Accountant replied 6 years ago
Hello, Do you have a positive balance in your equity account? Tom
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Customer reply replied 6 years ago
Yes.
Financial Professional: Taxtom, Accountant replied 6 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
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Customer reply replied 6 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?
Financial Professional: Taxtom, Accountant replied 6 years ago
Exactly, it is money that was reported on previous years K-1's and has already been taxed. Tom
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