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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Distributions and expenses in an LLC
Tax Talk

LLC partnership transactions

Dear Tax Talk,
I formed a 50/50 LLC partnership in 2007. I have two questions. We are each getting a rental and vehicle allowance. Should this be entered as an expense or should this be entered as a distribution and then we reconcile the actual expenses against the distribution amount when we do submit our personal taxes? Or can we leave this as a business expense and not show it on the Schedule K-1 or our personal taxes?

My second question is that we originally thought we should set a dollar amount for each voting share we own in the LLC, but no actual cash was used. In addition, we have both put cash into the LLC and entered it into our equity APIC (additional paid in capital) account. How should these transactions be booked? What accounts are debited and credited in these scenarios?
-- Terry

Dear Terry,
You can generally deduct the amount you pay or reimburse employees or owners for business expenses incurred for your business. There are two types of expense allowances: accountable and nonaccountable. Under an accountable plan, the recipient accounts to the payer for the expenses. If you make the payment under an accountable plan, you would deduct it in the category of the expense paid.

An accountable plan requires your employees or owners to meet all of the following requirements.

Requirements for accountable plan
1. Have paid or incurred deductible expenses while performing services as your employees
2. Have adequately accounted to you for these expenses within a reasonable period of time
3. Have returned any excess reimbursement or allowance within a reasonable period of time

Because it doesn't seem you meet these requirements, you can treat the allowance one of two ways. If the payments are equal, either way leads to the same bottom line. You can show the payments as guaranteed payments to partners, or as a distribution. The partner can deduct the actual expenses on Schedule E, Page 2, as unreimbursed partnership expenses. See the instructions for Schedule E unreimbursed partnership expenses for how to report this item.

If you put cash into the LLC, you would debit cash in the bank and credit the corresponding partner's capital account. The capital accounts are part of the equity section of the partnership's books. With respect to the foregone distributions, you have a couple of options.

Options for foregone distributions
1. Pass on entering this in the books and keep a separate record of the amounts due to each partner
2. Create a payable (liability or credit entry) for the amounts due and debit the corresponding partner's capital as a distribution

The lack of distributable funds is a problem with operating a business through an LLC treated as a partnership for tax purposes. You can see my prior article on why an LLC is not the ideal entity.

Bankrate.com's corrections policy -- Posted: April 1, 2008
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