Are partenership distributions taxable?

[LowTaxProInc]

2 partners-started company with $150 each. Both took $20000 by year end. K1 line 1 is $13199. Box 19 is showing the $20000 on the k1. WHen entering the k1 on the personal return, it doesn't seem to be showing the difference of the distribution and the line 1 as taxable income. What am I missing?

[abctax55]

Partnership CPE?

No, distributions (generally...) are not taxable.

[qbteachmt]

"What am I missing?'

Even if they never took any money out of the operation, the successful operation that results in taxable income is "passed through" to them, because that's how a Pass Through Entity functions for tax reporting purposes. That means you might take no money and still have to pay taxes on the partnership's operation.

You are confusing Cash Flow and Income.

"it doesn't seem to be showing the difference of the distribution and the line 1 as taxable income."

Taking the money is not an expense. Taking it or not taking it is not a Business Activity that generates income or expense. Taking money is removing the Asset (money). Not income and not expense.

This doesn't change, whether partnership, sole proprietorship or s corporation. Are you getting mentored or taking continuing ed for tax preparation? Time to do some studying.

[LowTaxProInc]

I was thinking that taking money from the company had to be taken as income on the personal side of things. 

ProConnect is very new to me and the entering is a bit confusing. 

[LowTaxProInc]

Thank you for the feedback. I intend to take more training and retake some after the season ends. On the personal side of things, I thought any income was taxable.

[LowTaxProInc]

I realize if they never took anything, it would also be taxable. But wasn't sure how to enter in ProConnect and really thought the 20k should be taxed personally.

[PhoebeRoberts]

Lacerte has a diagnostic for distributions in excess of basis. ProConnect likely has similar.

[qbteachmt]

"On the personal side of things, I thought any income was taxable."

The partnership is its own entity. It reports through the K-1.

If the partner takes out more than their ownership share (their basis), you would have to figure out how they managed to do this, and that is when things start to get complicated and might be taxable. Example: The partnership takes a loan, and instead of leaving that in the partnership, each partner takes an amount. They either Borrowed from the partnership (and need to repay it) or they are treating that as theirs to keep, which starts to trigger considerations such as Taxable to them, but wasn't income for the partnership.

Taking their own equity out of the business each tax year doesn't make it income for them or expense for the partnership. That's why I pointed out, you are confusing Cash Flow and Income. These are not synonymous.

[LowTaxProInc]

In this case. They started the partnership with $150 each. No loans and well....they did well and had a nice bank account at the end of the year. very minimal liabilities and were able to take $20000. It is not a loan. It was taken in check form. So that's why I thought that at least 20000 shoudle be taxable not just the 13199. So maybe 13199+6801=20000 which should be the taxable amount. Doing some training now. Not helpful yet.

***Revised. They just provided some additional income. So this makes the capital account not a negative and they are being taxed on 28191(new line 1 on K1) not 13199 (original line 1 on K1)...sighhhhh love tax season

[qbteachmt]

"It is not a loan."

That was a hypothetical, that would explain why there might be money in the bank for them to Draw, not having come from Operations.

"It was taken in check form."

That's just the Banking. That doesn't change the Accounting of that draw. Cash, check, chickens; it's Asset removed.

"They just provided some additional income."

Just now, in May of 2021, for 2020 business?

"So this makes the capital account not a negative and they are being taxed on 28191(new line 1 on K1) not 13199 (original line 1 on K1)...sighhhhh love tax season"

Or, they had a tax loss for the year, and the $13k was not wrong. Let's examine a theoretical: "So that's why I thought that at least 20000 shoudle be taxable not just the 13199."

You keep thinking their Activity of taking money is the same as having income. You are skipping over that this is a Pass Through Entity. They don't get "income" from the business Bank. The Business makes income or not. Cash moving is neither income nor expense until you know what it was used for or why it moved; Cash Flow = it's just moving. Removing your own asset from your own partnership is not a Business activity. There is no new income or new expense.

Let's pretend they net $40,000 of new cash by year end. Meanwhile, you are working on the taxes and there is some depreciation and other credits and deductions. Those are what I call in class: Not real dollar expenses. For instance, Mileage Allowance is a good example. In my pretend scenario, let's operate a delivery van. Even taking the operating expenses into account, there might be other equipment with depreciation and even bonus depreciation, which is Not Real Dollars. We didn't spend it; the tax return provides it as a deduction, though.

So, you are not going to successfully back-calculate income using their Draws. Because you are trying to include things that do not relate.

[qbteachmt]

"Doing some training now. Not helpful yet."

The partnership return is already late. The personal returns are due today. Put everything on extension, find a mentor, and get some help for your clients. Treat them Right.