Tax
Planning:
Tax Planning for LLC
Distributions
© 2003
Steven Alberty. All Rights Reserved.
Abstract
If
an LLC is taxed as a partnership, a distribution made to its members is
generally tax free under IRC §731. But you can't rely on this general rule
in planning for either current or liquidating distributions - there are
too many exceptions. It's important to evaluate the tax consequences of
every distribution. |
If an LLC is taxed as a partnership, a distribution made to its members is
generally tax free under IRC §731. But you can't rely on this general rule in
planning for either current or liquidating distributions - there are too many
exceptions. It's important to evaluate the tax consequences of every
distribution.
There are four different situations in which a member receiving a distribution
from an LLC can recognize taxable gain or income.
-
A distribution of money or
marketable securities by an LLC causes the member receiving it to recognize gain
under IRC §731(a)(1) if the amount distributed exceeds the member's adjusted tax
basis in his or her interest in the LLC.
-
A distribution of money or
property causes the member receiving it to recognize ordinary income under IRC
§751(b) if the LLC owns unrealized receivables or items of inventory that have
appreciated substantially in value and the distribution isn't made
proportionately to all members.
-
A distribution of money or other
property can cause the member receiving it to recognize gain under IRC
§§707(a)(2)(B) or 737 if the distribution is deemed to be related to the
contribution or if the member contributed property (other than the distributed
property) to the LLC within seven years prior to the distribution.
-
A distribution of money in
liquidation of a dissociated member's interest in an LLC may cause the member to
recognize ordinary income under IRC §736(a) if the LLC is engaged in providing
personal services and the member had a right to participate in the LLC's
management.
If the distribution liquidates the member's entire
interest in the LLC or is made when the LLC is wound up, the member receiving
the distribution can recognize a loss for tax purposes under IRC §731(a)(2) if
the distribution consists solely of money, unrealized receivables, and inventory
and the amount distributed is less than the member's adjusted tax basis in his
or her interest.
A distribution to one member of an LLC can also
cause other members to recognize taxable gain or income. This unpleasant result
can happen in two situations.
-
A distribution of property by an LLC to one member
can cause another member to recognize gain under IRC §704(c)(1)(B) if the other
member contributed the property to the LLC within seven years prior to its
distribution.
-
A distribution of unrealized receivables and
substantially appreciated items of inventory to one member of an LLC will cause
the other members of the LLC to recognize income under IRC §751(b) unless the
other members receive their proportionate share of these ordinary income assets.
An LLC recognizes neither gain nor loss when it
makes a distribution. But making a distribution has tax consequences to the LLC
in three situations.
-
If the member receiving a distribution recognizes
gain or loss under IRC §731(a), the LLC's tax basis in its assets is adjusted
(up or down) under IRC §734(b) if an IRC §754 election is made or is in effect.
-
If the member receiving a distribution has income
under IRC §751(b), the LLC's tax basis in its unrealized receivables and
appreciated inventory is increased by the amount of the income.
-
If the LLC is engaged in providing personal
services and a member whose interest is liquidated has income under IRC §736(a),
the LLC is entitled to either a deduction for compensation paid or to a
reduction in the amount of net income allocable to its continuing members.
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©
2003 Steven Alberty. All Rights Reserved.
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