LLC Distribution of Profits Delayed
Our small LLC (four members) which is just over a year old, made a lot of mistakes as we stumbled through our first year. We managed to get our 2008 taxes filed on time. In our filing, the small amount of profit that had accrued was divided among the four members who were listed in the filing. However, no member received any distribution of those profits during 2008, nor, in fact, has the profit been distributed to the members as of this June 2009. My question is this: do the members owe any tax liability for 2008 based on earnings that have not been paid? None of us included this in our personal income tax filings. When the profits are distributed, which is going to be done shortly, since it will be 2009 income, doesn't the tax liability occur with our 2009 income tax filings. Won't we need to provide each member with a 1099 indicating the amount of income they derived during 2009 from business conducted largely in 2008?
- Add new comment
- 344 reads
Tax on LLC Income
Hi,
Yes, probably, you will owe taxes on the LLCs income. I'm going to assume you did not make the election to be taxed as a corporation & the LLC filed a partnership return, Form 1065.
Part of the Form 1065 is a Schedule K-1 that divides the income or losses of the LLC to the individual members. The Schedule K-1 is how the income gets reported to the members and the IRS. Do not use a 1099. You will have an extremely big mess to unwind if you do that. :)
Each member should have received a copy of the K-1 & included it on their personal tax return on page 2 of the Schedule E.
The LLC does not pay tax. Instead the profits or losses flow to the individual members' personal tax returns on a pro rata basis. This is so regardless of distributions, or lack thereof.
So each member should go back and amend the 2008 personal returns to recognize the income (or loss) reported on the K-1. If you don't the IRS will likely send you a notice in about 8 months notifying you of the missing income & you will be stuck with penalty & interest on top of the taxes.
Your 2009 individual tax returns should only include the 2009 income or loss as reported on your 2009 Schedule K-1.
I hope this helps.
L:)