Negative capital account means more taxes?

[hubie]

Due to some personal obligations I had to withdraw (as distributions...not 'guaranteed payments') more money than was in my LLC member capital account, and now show a large negative balance.

Do I simply owe this money to my LLC, or does having a negative capital account affect me in other ways? (taxes, other issues). I believe I read somewhere that if your capital account is negative, you are taxed at the capital gains rate for every negative dollar. However, I think this was in reference to having a negative capital account upon dissolving the LLC or ownership share in an LLC.

I remain a partner to the LLC and plan to replenish the capital account with future profits.

So am I supposed to pay capital gains tax on my negative accoutn balance, or can it simply carry over to next year when I can easily repay it with profits?

[Jeff4cpa]

It depends on how your LLC is taxed. If it is taxed like a partnership, you can increase your basis by the amount of debt assumed, including real estate mortgages (called qualified non-recourse debt). If your share of liabilities plus the balance in your capital account (a negative in your case) is positive then you don't have to claim the income. As a part of tax planning (in November or December) you should have been offered the opportunity to either assume a larger portion of liabilities or to increase your basis with a capital contribution.

If your LLC is taxed like an S corporation, you have to go through the layers. First layer is retained earnings (no tax affect if the total is positive). Retained earnings is the account your distributions are closed into. The second layer is contributed capital (no tax affect if first layer + second layer is positive). Anything beyond the second layer is a distribution in excess of basis, and is taxable as a capital gain.