Business & farm

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.