title>Tax Guru-Ker$tetter Letter Wizard Animation

                 

Tax Guru-Ker$tetter Letter
Sunday, August 07, 2005
 
LLC Distributions

Q:

TP buying a replacement property thru his newly formed one member LLC. He lends his LLC $ 100 to be able to buy this property in cash. If he turns around and refinance it for $200, can he distribute it without paying any income tax?

 

A:


It will depend on his basis in the LLC, normally by the balance in his capital account.  If it has a positive credit balance of more than $200,000, such a distribution would have no tax effect. 

However, if a $200,000 distribution puts that capital account into a negative debit balance, the excess is required to be reported as taxable income to him.

A common way around this is to avoid pushing the capital account into a negative balance and post any payment amounts that would do so as a "Loan To Member: on the LLC's books.  To better document the status of a loan between TP and the LLC and protect against any possible IRS reclassification, it would be a good idea to draw up a loan agreement and have TP actually make payments on that loan.

I hope this helps.

Kerry Kerstetter

 


- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/07/2005 12:57:00 PM Send this post:

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