Enercio contributes $100,000 in exchange for a 40% interest in the calendar year ABC LLC, which is taxed as a partnership. In 2015, the LLC generates $80,000 of ordinary taxable income. Enercio withdrew $10,000 from the partnership during 2015. Enercio is taxed on what amount of the LLC's 2015 income? On how much of the $10,000 distribution will Enercio be taxed?

a) Enercio is taxed on $32,000 of the LLC's income

b) There will be no taxation on the $10,000 withdrawn

Explanation:

There are two events in the business

The first event is that Enercio contributes $100,000 to make up for 40% of the interest of ABC LLC

The second event is the withdrawal of $10,000 during the year 2015

Answer

1) From the partnership income of $80,000, Enercio will be taxed his full 40% of the income. Meaning he will be taxed 0.4 x $80,000 = $32,000. In other words, his full 40% of the income will stil be taxed regardless of the withdrawal

2) from the $10,000 collected, there will be no taxation because it is regarded as just a regular withdrawal by Enercio from the partnership.

A. $32,000

B. $0

Explanation: Limited Liability Partnership is a partnership that combines the corporate benefit of limited liability for the owners with the benefits of partnership taxation, including the single level of tax and special allocations of income, losses, and cash flows.

Enercio contribution = $100,000

Ordinary income = (40% X 80,000)

Enercio withdrawal = $10,000

Partner's Basis:

(contribution + ordinary income - withdrawal)

= ($100,000 + (40% X 80,000) - $10,000)

= ($100,000 + $32,000 - $10,000)

= $122,000 basis

A. Enercio will only be taxed on its proportion of the ordinary income that is ($80,000 X 40%) = $32,000

B. Partners do not pay tax on

withdrawals. You will only pay tax on a withdrawal if you withdraw more than your personal basis.