Phantom income refers to a tax liability for a partnership or individual on income that has not been distributed to them
. It is also referred to as "phantom revenue"
. This situation often arises when a business is profitable but growing, and the company wants to reinvest its profits into further growth
. Phantom income can be recognized by the IRS but not actually received by the taxpayer
. Some common scenarios that can lead to phantom income include:
- Debt forgiveness: When a loan or debt is forgiven, discharged, or released, it can be included in the gross income of the debtor for tax purposes
- Investment gains: Phantom income can occur when an individual is taxed on the value of their stake in a partnership or LLC, even if they do not receive any cash benefits or compensation
- Limited partnerships and benefits for non-married partners: Phantom income can arise in these situations, complicating the process of tax planning
To manage phantom income, it is essential to consult with a tax professional to help ensure that the taxes are either paid on the forgiven income or spread over a longer period of time
