You're Not Taxed on What You Take Out of Your Business | Three Things Thursday

"How much more can I take in distributions before I hit the next tax bracket?" It's one of the most common questions S corp and partnership owners ask. It's also the wrong question. In this episode of Three Things Thursday, I'm breaking down three things every pass-through business owner needs to understand about profit and distributions — and why confusing the two can lead to some very painful surprises in April. Here's what we cover: ▶ Thing #1 — Profit is taxable. Distributions are not. Your S corporation or partnership passes income through to your personal return via Schedule K-1. That K-1 income is taxable whether you took the money out or left it in the business. Distributions are the cash transfer of profits you've already been taxed on — generally not a separate taxable event. ▶ Thing #2 — When you take the money out doesn't change what you owe. The most common misconception: "I left most of the money in the business this year, so I won't owe as much." Wrong. Your tax liability is based on the profit reported on your K-1, not on how much you distributed. The timing of distributions has no effect on your tax bill — but it does affect your cash position when April arrives. ▶ Thing #3 — The profit on your P&L and the profit on your tax return are often different numbers. Accounting profit and taxable income are not the same. Non-deductible expenses push taxable income up. Section 179 and bonus depreciation push it down. That gap — between what your accountant reports and what the IRS sees — is where tax planning actually lives. If you operate an S corporation, a partnership, or a multi-member LLC, these distinctions matter every year. Three Things Thursday drops every week. Subscribe so you don't miss it. 🔗 Visit us at bourbonnaistax.com This video is for general educational purposes only and does not constitute specific tax advice for your situation. Bourbonnais Tax Associates LLC | Bill Bourbonnais, EA, CTC, CTP, CTS | bourbonnaistax.com