Distribution to parent LLC is income but not child LLC expense

[Alik Levin]

Dear all!

I have a company structure where a parent LLC owns children LLC's that own properties. When I look at the books that I manage via QuickBooks Online the distributions from children LLC considered as an income for parent LLC which is by design, the parent holding LLC doesn't sell anything rather makes money via distributions from children LLC.

The part I am confused is that from children LLCs perspective the distributions are not considered as an expense and not reflected in P&L rather in Balance Sheet. 

My worry is that I am taxed twice - once at children level LLC's since the distributions to parent not shown as expenses for children LLC's and second time I am taxed at parent LLC as the distribution from children LLCs considered as an income.

Bottom line - I see distributions in parent LLC P&L but I only see the distributions in Balance Sheet in children LLC's, not their P&L. Taxed twice?

Any insights and directions much appreciated.

Thank you

-Alik

[Linda Weygant]

I'm unsure if you're a single member LLC or multiple member. The following assumes you have multiple members. I'll address single member second.

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You are correct that when posting a distribution from a child LLC, it is NOT an expense to the LLC, so you've got the transaction half correct.

Your faulty logic comes in a misunderstanding that you are only taxed on the distributions at the parent level. That is incorrect. The parent is taxed based on the child LLC income regardless of whether that income is distributed. As I'm sure you know, your cash flow is often much different than your actual taxable income.

So from a bookkeeping perspective, the check is written from the child LLC account and you should code that to an equity account called "Member Draws" or "Member Distributions" or something like that.

At the parent level, when you deposit the check, you also hit a balance sheet account.  This will be a liability account called "Unearned Profit Distributions" or something like that.

Then, at the end of the year, when the actual taxable profits of the child LLC are finally known, you make one journal entry to debit that liability account and credit a revenue account for only what is being reported to you on the K-1.

So the books for the parent company will look like this:

January thru Dec, monthly entry:

Cash - Debit $100

Unearned Profit Distributions - credit $100.

So on December 30, you have $1200 in the cash account and a $1200 balance in Unearned Profit Distributions (the liability account).

Then, in March when you get your K-1, you find out that your taxable profits (maybe due to depreciation or whatever) were only $1000.

So on 12/31, you do the following journal entry:

Unearned Profit Distributions - Debit $1200.00 (to zero the account out for the year)

Member Draws (an equity account in the parent company) - Credit $200.00 (This will be the difference between what you drew and what is reported as income from the K-1)

Revenue from Child LLC - Credit $1000.00 (This should match the K-1)

When doing your tax return for the parent, you won't really do it on form 1065 of the partnership, you'll just report all of the child K-1s on form 8825, line 20.

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If everything is a single member LLC, first of all, you've unnecessarily complicated your life with parent/child LLCs, but I'm sure you know what you're doing. But you can do this one of two ways. Either report all of the child LLC activity on appropriate schedules (E or C) and don't report the parent LLC since it is just a gathering/accumulation of the child LLC activity. Or report only under the parent LLC and don't report the child LLCs.

I personally would report all the children and disregard the parent as the IRS prefers you to report each rental property separately.  This will also help later when trying to calculate out depreciation recapture and capital gain for a sold property.

If the parent LLC has activity separate from the children (like this is where you accumulate your mileage and office supplies or whatever), then just report that separate activity and don't include the income from the children.