LLC Accounting & Taxes

[Terry D EA]

A two member LLC. Member A (50% member) loans the LLC 150,000.00. Member A takes monthly draws of 3K per month. This is not a guaranteed payment and the amount is flexible. Is member A taxed on the draws or is this a reduction in equity? Member B is (50% Member) and has not made a significant or any investment in the LLC per se. Draws taken by member B are taxed as a distribution of profit correct? I know the distribution of profits is not expensed on the LLC's books. Here is the question, the LLC is showing a loss and I assume the draws by member B are still taxable and not subject to employment tax and the loss that passes thru very well may offset any taxable income from the LLC. Am I correct here? I need to clear the mud from the water here. Any help is appreciated.

Thanks,

Terry D.

[kcjenkins]

Terry, is it a loan or is it equity? Can't be both. If it's a loan, then the amounts taken would be repayments, and neither taxable to him, except for interest, nor deductible for the business, except for interest. If it's equity, its not taxable to him nor deductible by the business.

For the other member, if he had no investment in the business, I'd assume unless you have some good argument I can't think of that this WOULD be not only taxable income, but also subject to SE tax, as the only logical reason for paying him would be for work done. What am I missing?

[Terry D EA]

KC,

Thanks for the reply. For Member A it is a loan and re-payment is expected. So, the repayments can be guaranteed payments and not taxable. Your reply on Member B is exactly what I thought. This is family but listed as an LLC with NC and not a family partnership. I am trying to find a good way to explain this to the client so it makes sense to them. Member A wants his son to be a 50% partner with him but he has made no investment. As we sure that the draws to this member would be subject to SE tax? Seems to me it would be which would make him the same as a W-2 employee. Does this help?

Thanks,

Terry D.

[Gail in Virginia]

If member A "gifted" member b with 50% of the partnership (which seems to me the only way you could own half without any investment), wouldn't member b's basis be the same as member a's ( or the FMV at the time of the gift, whichever is less)? And in that case the distributions could be non-taxable, to the extent of basis. However, depending on the amount of the basis attributed that way, this raises the question of whether or not a gift tax return was required or filed. And I don't think a loan repayment would be considered the same thing as a guaranteed payment at all - it is a payment of principal and interest on a loan and should be treated the same whether paid to a partner or a bank.

[Bart]

KC,

For Member A it is a loan and re-payment is expected. So, the repayments can be guaranteed payments and not taxable.

Thanks,

Terry D.

If member A has a loan to the LLC then the re-payments are repaying the loan and are not guaranteed payments. The interest portion of the re-payments would be taxable.

You have not said how the LLC is taxed but if it is taxed as a partnership, guatanteed payments to partners whould be income taxable and subject to self employment tax.

[mcb39]

If member A has a loan to the LLC then the re-payments are repaying the loan and are not guaranteed payments. The interest portion of the re-payments would be taxable.

You have not said how the LLC is taxed but if it is taxed as a partnership, guatanteed payments to partners whould be income taxable and subject to self employment tax.

This is exactly what I was going to post. Also, in regard to Gail's post; if one partner contributes the money and the other partner does the work, can't it still be a 50/50 Partnership? There are too many things that we don't KNOW about this setup.

[Pacun]

Partner A didn't gift anything to Partner B. Partner A's basis is whatever money he invested. Partner B's basis is zero. Partner A made a loan to LLC so when he collects that money back, no tax transaction happens; except for interest if any. Any money paid by LLC to partner B should be treated as money paid for services and subject to payroll taxes.

Now, if you are saying that Partner B is personally liable for the loan, then he could have a basis on the LLC, but I don't believe that's the case.

[DANRVAN]

If son is 50% partner for profit and loss, then his share of losses will reduce his self employment income. You should get a copy of the partnership agreement before you proceed.

[kcjenkins]

For Member A it is a loan and re-payment is expected. So, the repayments can be guaranteed payments and not taxable. Your reply on Member B is exactly what I thought. This is family but listed as an LLC with NC and not a family partnership. I am trying to find a good way to explain this to the client so it makes sense to them. Member A wants his son to be a 50% partner with him but he has made no investment. As we sure that the draws to this member would be subject to SE tax? Seems to me it would be which would make him the same as a W-2 employee. Does this help?

Terry, be careful here, because the term 'guaranteed payments to partners' has a special meaning in partnership tax law, and loan repayments are not "guaranteed payments". Now, as you say, the LLC is taxed as a partnership, so the payments to the son for his work would be guaranteed payments, and thus subject to SE tax. But the loss from the business would also go to the SE form, so it will offset some or all of the guaranteed payments.

[Terry D EA]

Thanks to all of you and I enjoyed reading each response. I do apologize that I did not get all of the correct information from the client. My client kept telling me that he loaned the company money but did not tell me where the money he loaned came from. Apparently, I over thought this whole situation. Member A took a home equity loan to start the company. The company is repaying the loan to the bank and not Member A. Member A basically did gift 50% to his son. As it turns out, neither invested any personal funds in the company and both are simply performing services for the company and all payments received are taxable, which as KC mentioned, may be offset by the loss that will pass thru this year. This company is a used car dealership.

For the gift tax return comment. Under the new information, I don't see the need or possibility of a gift tax return requirement as nothing of any monetary value has been gifted. All assets have been purchased with company funds. Simply put, this is a two member LLC taxed as a partnership.

Thanks!

Terry D.