# Tax distribution

Cash a pass-through business pays owners so they can pay its tax bill.

Two things decide whether the clause works, and the rate everybody argues about first is only one of them. It lives in the [operating agreement](https://searchspheresource.com/glossary/operating-agreement) rather than in a decision made each spring, so a percentage drafted around one person's bracket quietly underpays anybody in a higher one the year profit is larger. The other is the lender: a credit agreement that blocks payments to owners blocks this one too, which is how a good year turns into a bill somebody funds out of savings. On an SBA purchase it runs the other way for investors: equity counted toward the injection may receive tax distributions and nothing else until the loan is paid off. Ask for the clause and the lender's consent together, because either on its own is worth very little. In a waterfall it counts as a distribution, usually as an advance against the next one, so it sits inside the [MOIC](https://searchspheresource.com/glossary/moic) and [IRR](https://searchspheresource.com/glossary/irr) arithmetic as cash out to the owner even though the owner hands it on to the tax authority.

In numbers: A 30% assumed rate on $250,000 of allocated profit distributes $75,000 to cover the tax, and an owner in a higher bracket funds the rest themselves.

Source: https://searchspheresource.com/glossary/tax-distribution
Not dated: A definition is editorial: what a term means, why it matters, and an example. None of it reads a source that can go stale, so there is no date to take and a stamped one would be the build time wearing a costume.

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