What is the tax consequence of a partner draw from a partnership when there are no profits?

Thanks for the explanation! So just to make sure I understand - if I take out $15k from my $50k contribution, I'm basically just taking back my own money and don't need to report it as income on my taxes? Does the partnership need to file anything special when this happens?

That's correct - you're just taking back part of your own capital contribution, so it's not income. It's essentially a tax-free return of your investment, as long as you stay within your basis. The partnership doesn't need to file anything special at the time of the distribution, but it should be properly reflected on your Schedule K-1 at tax time. The K-1 will show your reduced capital account balance after the draw. Your partnership will continue to maintain records of your capital account, showing your contributions, your share of income or losses, and your distributions.

Does it work for other business structures too? I have an S-corp and take distributions sometimes but I'm always worried I'm doing it wrong.

I'm skeptical about these online tools. How does it actually know the details of your specific partnership agreement? Those can get complicated with special allocations and stuff.

It absolutely works for S-corps too! It has specific modules for different business entities and handles the unique tax rules for each. For S-corps it even helps you determine reasonable salary requirements vs. distributions to avoid those red flags with the IRS. The tool is surprisingly sophisticated with partnership agreements. You can upload your actual agreement document and it extracts the special allocation provisions, capital account maintenance requirements, and distribution waterfall structures. It then applies those to your numbers to give you entity-specific guidance.

Wait, how does this actually work? Do they just call the IRS for you? Why would that be any faster than me calling myself?

Yeah right. The IRS doesn't even answer their own phones. I find it hard to believe some third-party service can magically get through when millions of taxpayers can't.

They don't just call for you - they use some specialized technology that navigates through the IRS phone system and holds your place in line. When they reach a real person, you get a call to connect with the agent. It's basically like having someone wait on hold for you. The reason it's faster is they have some kind of system that continuously tries different routing options until it finds the shortest wait time. I was skeptical too, but when I got connected to an actual IRS agent within 15 minutes after trying for days on my own, I was convinced. They're just solving the hold time problem, not providing any tax advice themselves.

That's interesting! Our partnership does have a small business loan of about $30k. How would that affect my basis calculation? Would my share of that loan (50%) increase my basis by $15k?

That's exactly right. If you're a 50% partner and the partnership has a $30k loan, your share would be $15k, which increases your basis by that amount. So your total basis would be your $50k contribution plus your $15k share of the debt, giving you $65k of basis to withdraw against before any tax consequences. This is one of the advantages of partnerships - the ability to include your share of partnership debt in your basis calculation. Just be aware that if the partnership pays down that debt later, your basis will decrease accordingly.

I tried using TurboTax for my small partnership last year and it was ok for basic stuff, but not great for tricky distribution questions. Ended up having to hire a CPA anyway because it didn't clearly address basis calculations when you have both losses and distributions.

This is really helpful advice about structuring it as a loan instead! I hadn't considered that option. Could you explain a bit more about how that would work? Would I need to charge myself interest, and how would that affect the tax situation compared to just taking a regular draw? Also, do partnership agreements typically need to be amended to allow for partner loans, or is that usually covered in the standard language?

Great point about the loan structure! If you set it up as a partner loan, you'd typically need to charge a reasonable interest rate (the IRS has applicable federal rates that change monthly). The advantage is that the principal repayment to you isn't taxable, and the partnership can deduct the interest payments as a business expense. Most partnership agreements have provisions for partner advances or loans, but you'd want to review yours to make sure. If not explicitly covered, a simple amendment or separate loan agreement would work. The loan approach also gives you more flexibility - you could convert it to a capital contribution later if the business takes off, or structure repayment terms that work with cash flow. From a tax perspective, you'd report any interest income on your personal return, but the principal amount isn't taxable since it's just repayment of money you loaned. This can be especially useful if you might need more than your current basis would allow for distributions.

This documentation advice is spot on! I just went through a similar situation with my consulting partnership, and having clean records saved me so much stress during tax season. One thing I'd add - if you're using QuickBooks or similar accounting software, make sure the distribution is properly coded as a "partner distribution" rather than just a general expense or draw. This will automatically track it against your capital account and make it much easier when your accountant prepares your K-1. Also, @Lena Müller, since you mentioned this is a startup that hasn't turned a profit yet, you might want to consider whether taking this distribution now is the best move strategically. I know you need the cash, but if your business is close to profitability, keeping that $15k in the company might help you get over the hump faster. Just food for thought! The paper trail suggestion is crucial though - I've seen too many partnerships get into trouble because they treated distributions casually without proper documentation.