LLC takes a loan of 2M, distributes 1M to each partner, each partner pays tax on dist. Next year - 1M revenue and all 1M paid to lendor. Is this 1M deductable?

[mconnelly3505]

You can assume the 1M payback to lendor goes primarily against principal.   

[Rick19744 · Accepted solution]

You also need to look at the impact this will have on any interest paid on the initial loan.  This is what is called a debt financed distribution and any interest needs to be separately stated.  You could have some undesirable tax consequences here.

Additionally, while the debt does increase your tax basis, it may not increase your at-risk basis.  These are two distinct basis items and have very different tax impact.

For this amount of $$, you should consult a tax professional so you don't have some unintended tax consequences.

[TaxGuyBill]

No.  Payments for a loan (principal) are never deductible.

[mconnelly3505]

Thanks - should we have paid tax on the initial distribution?  While the distribution exceeded the old basis, doesnt the loan increase our basis even if nonrecourse?

[Opus 17]

Under what justification was money paid from the LLC to the partners?  As wages? Profit distribution?  Then it is taxable to the partners.  But then, the partners should not be repaying the loan, only the LLC repays the loan.  If the partners have to pay money into the LLC so that the LLC can afford to repay the loan, I think that's an investment in the partnership. It's not deductible on the partners' personal return unless the partnership goes bankrupt in which case it is an investment loss.  Meanwhile the principle repaid by the LLC to the lender is repayment of a loan which is never deductible, just interest.

I think there may be things you aren't telling us, at the very least, this arrangement was structured very oddly.  What was the purpose of the LLC borrowing 2M if it was only to pay directly to the partners and not be invested in building the business?  I think professional tax and accounting advice is strongly recommended.

[ScruffyCurmudgeon]

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