Hi
Me and my partner started a LLC company in 2010. We made "X" net income for the year. I have 25 % partnership in the company. We agreed to keep "Y" as reserve(to care of monthly expenses)after which the amount left "Z" was distributed. I received 25% of "Z", but our accountant is saying that I will be receiving a K-1 for 2010 with tax liability of 25% of net income "X" and not "Z" even though I only got 25% of "Z". Can you please confirm if this is right?

A partnership files Income Tax Return Form 1065 and does not pay any taxes. The profit of a partnership is distributed among the partners. For this the partnership issues Form K-1 to the partners. Partners must include this profit in their own income and on this income pay 15.3% employment taxes. Your profit from the partnership has nothing to do with the distribution. Your U.S. Tax Return: Partnerships (http://taxipay.blogspot.com/2008/09/partnerships.html)

Agreed, most clients have a hard time understanding the concept of distributions vs. profit sharing ratios. Think of it this way, distributions are mostly tax free, as you pull out money that was already taxed at some point in time. Current year end income is waiting to be taxed. Once the income is taxed at one point or another, you can distribute that income tax free. Hope this helps

Greg Freyman, CPA
Www.taxproff.com