Are My Distributions Taxable? - Ketel Thorstenson - CPA | Advisors (2024)

FAQs

Are My Distributions Taxable? - Ketel Thorstenson - CPA | Advisors? ›

Usually the answer is “no”. Distributions (or draws) from a sole proprietor business, partnership, limited liability company (LLC), or s-corporation are usually nontaxable events. When a distribution is paid to an owner of a business, it reduces the owner's capital account and basis in the business.

Dividends come exclusively from your business's profits and count as taxable income for you and other owners. General corporations, unlike S-Corps and LLCs, pay corporate tax on their profits. Distributions that are paid out after that are considered “after-tax” and are taxable to the owners that receive them.

The Owner's Draw Method

No taxes are withheld from the check since an owner's draw is considered a removal of profits and not personal income.

Taxes are assessed on the entire distributive share.

So, each LLC member must pay taxes on their whole distributive share, whether or not the LLC actually distributes all (or any of) the money to the members.

Are partnership distributions taxable? Because each individual partner pays taxes on their share of the partnership income, they are not taxed on any withdrawals or distributions.

How dividends are taxed depends on your income, filing status and whether the dividend is qualified or nonqualified. Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%.

File Form 1099-R for each person for whom you have made: a distribution of $10 or more from profit-sharing or retirement plans, IRAs, annuities, pensions, insurance contracts, survivor income benefit plans, etc.

When the income is distributed to its shareholders, it is generally taxed as a dividend. This results in the same income earned by the corporation being taxed twice (double taxation), once at the entity level and again at the shareholder level.

So any income you take as distributions rather than salary saves you that cost in taxes. To curb the obvious temptation to take all your gross receipts as distributions rather than salary, the IRS sets a basic guideline: You have to pay yourself a “reasonable salary.”

Consider capital gain distributions as long-term capital gains no matter how long you've owned shares in the mutual fund. Report the amount shown in box 2a of Form 1099-DIV on line 13 of Schedule D (Form 1040), Capital Gains and Losses.

Are LLC distributions taxed twice? ›

Fortunately, LLCs are not double-taxed. Startups structured as C corporations are the only entities that have to pay their taxes twice. S corporations and sole proprietors can also avoid double taxation. Unlike C corporations, LLCs and sole proprietors are legally considered pass-through entities.

A draw and a distribution are the same thing. IRS terminology on tax forms shows the latter “owners distribution” as the filing term. It is coined an owner's draw because it is a withdrawal from your ownership account, drawing down the balance.

Portfolio income (interest, dividends, royalties, gains on stocks and bonds) is considered passive income by some analysts. However, the IRS does not generally consider portfolio income as passive.

A taxable distribution is when money or property is given from a trust to a person who is skipping a generation (like a grandchild) and it is not considered a direct gift or a taxable end. This means that the person receiving the gift may have to pay taxes on it.

Most investors will be familiar with the term 'dividend', but less familiar with what a 'distribution' is. Essentially investors receive dividends when they're invested in individual shares. They receive distributions when they're invested in ETFs.

Disguised Sale Rules Defined

If the transfer of property and the transfer of money and/or other consideration are made within two years of each other, the transaction is presumed to be a disguised sale unless the facts and circ*mstances clearly establish that the transfers do not constitute a sale.

Payroll taxes are a 15.3% tax on income that covers Medicare and Social Security (separate from your income tax). It can add up fast! So any income you take as distributions rather than salary saves you that cost in taxes.

File Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for each person to whom you have made a designated distribution or are treated as having made a distribution of $10 or more from profit-sharing or retirement plans, any individual retirement ...

Form 1099-DIV is used by banks and other financial institutions to report dividends and other distributions to taxpayers and to the IRS.