Q: When “pass-through” entity owner(s) take distributions as part of their compensation package, is it correct that there is no tax liability on the distributions?
A: Yes, that is correct. There is no income tax imposed on distributions as ordinary income even when taken as part of a planned compensation package.
Only when an owner, partner, or member recovers his or her entire investment in the company in the form of distributions or withdrawals is there a tax impact. Distributions taken after recovering one’s entire investment in the company– designated as “basis” in IRS jargon – are taxed by the IRS at the long-term capital gain rate.
Q: Is it true that only general partners can be managers in a partnership?
A: Yes, that is correct. All general partners in a general partnership share management responsibility. Only the general partner in a limited partnership has management responsibilities. Limited partners have no role in managing a limited partnership.
Course overview: The Credit Write-Up and the CRE Analytical Process