Tax Distribution

A tax distribution is cash paid out to members purely to fund the tax liability arising from income the SPV allocated to them. It exists because of pass-through taxation: an LP can be allocated taxable gain on a recapitalisation, a partial secondary sale, or interest earned on held cash, in a year when they received nothing. Where the operating agreement provides for them, tax distributions are usually computed at an assumed highest marginal rate and treated as an advance against future distributions, so an LP who receives one gets correspondingly less at the next payout. Many single-asset venture SPVs omit the provision entirely, on the reasoning that the vehicle holds illiquid stock and has no cash to distribute anyway.