Help me please. I invested >140,000 in an LLC this past year in the 4th quarter and received a 10,600 return on the investment as a distribution. I received the K1 and it is stating that the Business income is >24,000 dollars and when I enter this into turbotax I am being taxed about 10,300 dollars - which amounts to the amount of my distribution just about. I did not get this 24,000 in business income. I don't know where it is - I received 10,600. It is looking like my return on my investment is about 0.7%. I am worried that if the business bellies up that I will never see that money back. Should I get out of this LLC ASAP? Why am I paying taxes on this >24,000 if I didn't receive it and might never receive it?
You need to make the decision as to whether this was a good business decision, but first you need to understand the mechanics of how the LLC works.
LLC's taxed as a partnership are a pass-through entity. The entity does not pay tax. All income and expense passes through to the members and it is taxed at the individual level; via the K-1.
Not very many LLC's will distribute out all of the income as they need operating cash. What is generally done is exactly what was done in your case; the LLC determines a tax rate of the members (federal and state) and will distribute out enough $$ so that it will cover the member's tax impact of the K-1.
That is exactly what the LLC did. You have no out of pocket tax cost based on your facts.
The other part of LLC tax is that you need to maintain a basis schedule of your investment. This begins with your initial capital contribution and is updated annually by the applicable line on your K-1. This basis schedule is very important as it will be used to determine your overall gain or loss when you exit the LLC. It will also be necessary if the LLC passes out losses as you can only take losses to the extent of your basis.
Attached is a link to an IRS commentary on basis: