INCOME TAXES - HOW DO THEY FLOW

searcher profile

December 29, 2023

by a searcher from University of Pennsylvania - The Wharton School in Miami, FL, USA

To the accountants or others with experience...

When you have a preferred / common structure in a self-funded deal, how do income taxes work prior to the pref being distributed back to investors - assume LLC.

Do pref investors pay 100% of income taxes on K1 assuming that there is still pref outstanding?

If you have a year where you paid back all pref and then start to distribute to common, are income taxes then paid based on ratio of pref to common?

Happy to chat for 10 minutes as well if unclear.
Thank you and Happy New Year!
Jason

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
The business should make distribution to cover K1 taxes for all investors. I'm currently working with one where the investment documents spell out that company will.pay 33 1/3% of K1 income to cover taxes.
commentor profile
Reply by an investor
from Western Washington University in Key West, FL 33040, USA
Proportionate to total units outstanding (i.e. common equity ownership)
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