First part of the question. My friend and I are 50/50 owners of an LLC
(not a corporation)... after we do expenses, we can split the profile
by simply taking money out (as an owner draw), since the stuff flows
through to our taxes on a schedule C anyhow, right? (I know with a
corporation, you have to run payroll and pay salary to get money
out...)

THANKS
Eric

Hello and thank you for your question.

Yes, as long as the money you take out is not more than the profits
plus your "basis" which is the money you invested in setting up the
business, there is no extra tax and you will simply report the LLC
profits on your personal returns.  So the only way you'd have extra
income is if the cash you distribute from the LLC (or any partnership)
is more than that total of profits plus basis.

But since there is no withholding tax on LLC profits, you should
consider making estimated tax payments on your share of partnership
profits, to avoid penalties if you fail to make adequate tax payments
each quarter.

Here's how the IRS explains it:

http://www.irs.gov/publications/p541/ar02.html#d0e2927
The basis of a partnership interest is the money plus the adjusted
basis of any property the partner contributed.

http://www.irs.gov/publications/p541/ar02.html#d0e2139
A partner generally recognizes gain on a partnership distribution only
to the extent any money (and marketable securities treated as money)
included in the distribution exceeds the adjusted basis of the
partner's interest in the partnership.

http://www.irs.gov/publications/p541/ar02.html#d0e1298
A partner's income or loss from a partnership is the partner's
distributive share of partnership items for the partnership's tax year
that ends with or within the partner's tax year. These items are
reported to the partner on Schedule K?1 (Form 1065).
Gross income.   When it is necessary to determine the gross income of
a partner, the partner's gross income includes his or her distributive
share of the partnership's gross income. For example, the partner's
share of the partnership gross income is used in determining whether
an income tax return must be filed by that partner.
Estimated tax.   Partners may have to make payments of estimated tax
during the year as a result of partnership income.

Search terms used:
partnership distributions basis profit site:irs.gov

Thanks again for bringing us your question, and let me know if I can
help you further with your other questions.

Sincerely,
Google Answers Researcher
Richard-ga

---

Clarification of Answer by richard-ga on 29 Nov 2004 14:34 PST

Hello again:

I'm putting this here so that you'll get an email notification.
Regarding your recent comment, I suggest you post a new question and
at a new price.  If you're looking for a short answer like the one I
gave you here, a $5 price may be OK.  If you want more detail I'd
suggest a price in the $20 to $40 range.

If you want to reserve the question for me, put my name in the
heading.  If you prefer to make your question available to any
interested Researcher that's OK too.

-R

Hi Richard,

I have a couple of questions about

Need to understand something about holding land or any other
investment in LLC (classified to be taxed as partnership). So say when
we finally sell the investment in the LLC :

1) Will we be able to report the sale of land as long term capital
gains tax in our individual 1040s ? Or it has to be reported as
ordinary income and pay higher tax ?
2) Will we be subjected to Social Security and Medicare taxes on those
profits since the entire profits are being passed thru ?

thx,
deepak

Doesn't your answer assume that the LLC has elected to be treated as a
partnership, not a corporation, and itsn't it true that it could elect
to be treated as either a partnership or a corporation for tax
purposes.

oregon41