Is there a way to get $0 on K1's for partnership LLCs as the members decided not to take any profit for year 2017? Thanks.

[svvidyanath]

I am a member of a LCC which owns a commercial real estate property.  The bank has asked us to maintain a reserve balance of $40k at any time for unexpected expenses. My question (#1) is :    Is there any provision to show this $40k in tax filings as an expense ? Other important question (#2) I have is this year all the members of LLC have decided not to take profits until that reserve balance of $40k is reached. At the end of 2017, profit/loss statement shows a profit of 20k, so is there a way to get $0 on K1 as the LLC members decided not to take any profit ?   Thanks.

[Rick19744]

Responses to your questions and some commentary:

Maintaining a reserve as requested by the bank and tax implications are two completely separate matters.  The bank is just telling you that they don't want all the cash to be distributed out.

1. The $40,000 reserve is just that, a reserve of excess cash.  This is not a deduction / expense.
2. Taking profits and the reserve are not related.  An LLC taxed as a partnership is a pass-through entity.  This means that the income and losses are not taxed at the LLC level but are passed through to the members and it is the members that pay the tax.
3. If your LLC shows $20,000 in profit, then you have $20,000 in profit that MUST be passed out to the members based on their ownership on their respective K-1.  The members don't get to decide which year they want to report the income or loss.
4. Who ever you are dealing with at the bank should understand how LLC's taxed as a partnership work.  If they don't you need to change bankers.  So in your example let's say that you have the $20,000 of profit in the bank as cash.  The operating agreements of LLC's will have language that it will at a minimum distribute sufficient cash to cover the tax impact of the earnings.  So in your instance, you need to determine a tax rate (federal and state) that meets the needs of the members to cover the tax.  Let's say this is 30% (25 federal and 5 state).  To cover the tax implications of your income of $20,000, you need to distributed out $6,000 to the members based on their ownership percentage.  The remainder ($14,000) will remain in the LLC to build up your reserve as required.
5. If the bank will not allow you to make distributions, then this means that the tax implications of the profit will need to be covered by the members from their own means.  

[svvidyanath]

Thank you Rick !

[Rick19744]

Welcome

[ProfitPartnersTax]

How do we prevent our reserve from being taxed twice?  We left $10k in the bank year end and our K1's include $5k for each member as ordinary income since the 10 K was not listed as an expense.  We will also be taxed when we distribute that 10k this year.

[Rick19744]

You need to make sure you understand how partnership tax works.

As a partner / member in an entity taxed as a partnership, you need to maintain a basis schedule of your investment in the entity.  I have attached a link that should get you started; see page 3.

https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf

Since the partnership is a flow through entity each partner is taxed on all income regardless of whether of not it is distributed out.  As long as a partner has basis, any future distributions are not taxed at that time.  Thus the avoidance of double tax.

[ProfitPartnersTax]

Thank you Rick -  this is the first time in 10 years we left cash in the account so it caught us by surprise. I assume we need to start using the balance sheets again to track this 'taxed' amounts?

[Rick19744]

No. 

You need to have a basis schedule which is why I included the link to the K-1 instructions to provide some guidance in this area.