Cash Distribution Received from Pass-through LLC?

[Jeff65]

My wife and I own an LLC (Florida), no employees. We've been incorrectly filing on the Schedule C the last couple of years. This year we've realized our mistake and are switching to the K-1, which is obviously more complex.

In using TurboTax Business, when inputting LLC members (again, just my wife and I), one of the blocks is to enter "Cash Distributions Member Received from LLC (Do not include guaranteed payments or salaries paid to the member)"

It's not clear at all to me what we put here. We are both 50% owners, the LLC is a pass through entity, our profit is our "pay" for tax purposes (in the past we've divided income and expenses in half and filed a schedule c for each of us, married filing jointly).

Is this distribution simply our business profit, divided by 2, for each of us? Or is this something else entirely?

[tagteam]

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@Jeff65 wrote:

Is this distribution simply our business profit, divided by 2, for each of us? 

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Your distribution would be the figure you actually distributed out of the partnership (i.e., if you retained all of the net profit in the partnership, then there is no distribution but you will each have tax liability on the net profit - it is passed through to the partners/members, regardless).

For example, on a net profit of $10,000, a distribution could be the be transfer of $5,000 in cash to each of you.

[MinhT1]

Cash distributions received from the LLC are drawings from profits that members can make.

This happens when you or your spouse write yourselves a check from the LLC. These drawings are not taxable when you have basis. They only reduce your basis in the LLC. And they are reported in box 19 of your Schedule K-1 with code A.

[Jeff65]

So there's an arbitrary line between the business' bank account and our join personal checking account, and whenever money is transferred from the business account to the personal account, it is a distribution. Is that correct? For some reason I thought that, because we are a pass-through entity, all profit was considered to be distribution no matter what account it happens to sit in.

I guess that's not the case?

If not, then our combined draw would most easily be calculated as: beginning balance + net profit - ending balance.

[tagteam]

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@Jeff65 wrote:

...I thought that, because we are a pass-through entity, all profit was considered to be distribution no matter what account it happens to sit in.

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Actually, the above statement is close except, as a pass-through entity, all net profit is taxable irrespective of whether or not there are any distributions (i.e., profit is not required to be distributed).

[Jeff65]

Ok. I guess I just don't see the purpose of recording the distributions at all. If we're being taxed as if it's income, and it's treated like income, what on earth is the purpose?

[BenT9]

Let me help you or perhaps add to your confusion.  A 2 member LLC is treated as a partnership but here is your salvation.  An entity that would normally be treated as a partnership can elect not to be treated as a partnership if the income of the partners can be adequately determined without a partnership-level computation.  This is what you have been doing and I would argue that you have in effect elected out of the partnership provisions by your previous filings.  I would file as you have in the past and attach a statement to your return that "The members of the (Your LLC's name) are husband and wife and have elected out of the provisions of Subchapter K of the Internal Revenue Code since (insert the year you first filed)."

As you can see from the other responses Partnerships are extremely complicated and will require you to file a Form 1065 and Schedule K-1s for each partner -  a daunting task for someone who is not a tax professional.  I don't know why you are filing separate Schedule Cs for the same business unless you have some dire need to segregate all of your activities.  My advice to a new business is usually to start a single member LLC for some protection from liability.  Be sure you follow all of the provisions your state has to keep the LLC registered and treat it as a separate entity with separate bank accounts which you have done.  One benefit of the LLC is that a single member LLC is a "pass through entity" requiring no separate return - you just pick up its income on a Schedule C.  For some reason having one of you own the business doesn't work for you.  I think electing out of the partnership provisions (Subchapter K) is the way for you to go or you will be headed down a difficult path.   If you truly want to treat the LLC as a partnership find a tax person familiar with partnerships to advise you and do your return.  I can't imagine a neophyte can do an accurate  Form 1065 without a great deal of help.  If you wish you can text me at [phone number removed] with your phone number tomorrow after 10:00 EST  and I can fill you in on this as a favor.  I don't know what state you are in or if your state has some rules that differ from the Federal rules!!  Usually they are the same.

[BenT9]

I reread your post and I believe you are Trying to complete a Schedule K-1 to pick up your income.  In actuality you must first complete a Form 1065 and use this data to prepare Form 1065 K-1 for each partner.  The Form 1065 and Form K-1s are returns that are filed with the IRS.  Then the data from the K-1 is entered into your tax return.  Schedule K-1 when properly filed out tells you exactly what your taxable income is and any other tax attributes that pass through to the partners.  Sorry if i underestimated your knowledge but I want to be sure you get the right answer to your question.  You are dealing with a very complex area of taxation.  If you don't call me please contact a local tax person with expertise in Partnerships - not a generalist.

[BenT9]

I see that I can't provide you with contact information.  Please heed my advice I have been doing this stuff all my life and did work with a lot of partnerships.  You don't seem to have the required expertise and will perhaps cause yourself to get into some unforeseen tax problems that can be readily avoided.  Please check out my advice with a local CPA.  Florida does not tax LLCs but you should be filing annual reports.

[tagteam]

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@BenT9 wrote:

 I think electing out of the partnership provisions (Subchapter K) is the way for you to go....

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The original poster cannot elect out because in Florida, LLCs own the property, not the members, and members cannot actually demand property distributions.

[Jeff65]

So are these posts censored for some reason? What in the world is wrong with this forum? Moderators must be slap-happy as my post keeps getting deleted. That or the algorithms need a tune-up.

In any case, not a good user experience.

[BenT9]

tag team I am not familiar with Florida's ownership requirements for LLCs but as far as I can recall a single member LLC picks up their income on a Schedule C no matter the name the various property is held in.  I would think that if an LLC is treated as a partnership for tax purposes electing out would be permitted no matter what name the property is held in.  The benefit of LLCs is their flexibility.  Of course a lot of research is required to come up with a fully supportable answer and that's why I suggested an expert in partnership matters be consulted.   I can't imagine why anyone would want the complexity they are adding to their business.  It would seem to me that a single member LLC with one owner would work for a married couple and avoid the necessity of filing another tax return.  I think your response points out the need to pursue advice from someone who can delve into their situation at length.

[tagteam]

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@BenT9 wrote:

I would think that if an LLC is treated as a partnership for tax purposes electing out would be permitted no matter what name the property is held in. 

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Yes, but it is not; sort of akin to why a partnership with only two partners who are married to each other can elect qualified joint venture (QJV) status but a married couple who are the only members of an LLC cannot (unless they reside in a community property state).