Phantom Income

From CEOpedia | Management online

Phantom income (fictitious income) - income that is apportioned to a partner that he must pay tax on but does not really receive in the form of ready cash ( J. Reuting, 2008 page 343). If the operating agreement allows for it, the LLC's (limited liability company) managers can decline to distribute trading profit. The lender is even still required to pay income taxes on these profits as if they were received. This is phantom income and a way that a lot of seasoned LLC proprietors pass on their income tax burdens to their obligee instead of their cash (Jennifer Reuting, 2008 page 192).

Real and fictitious income

The ability to draw the distinction between "real" income and "fictitious" income is very important. Thus, "every real profit

  • every evert shift
  • increment in wealth or
  • increase in property,

including unrealized capital yield" has to be treated differently from "fictitious earnings and fictitious capital increases". Income that has not been put at the disposal of the ratepayer or does not yet exist is merely fictional income. Phantom Income is non-existent from a civil-law point of view and has not led to a shift of value or assets. Nevertheless, income fictions are not the same as a method of calculating advantages that have been in fact received (M. J. Ellis 2005, page 23). According to some scientists, fictions are not about calculation, but about allocation: "It is up to the Contracting States to determine the money value of the income components allocated to them by the treaty. Such fictions are essentially not fictions, but lump-sum approximations of reality" (Wattel, Marres 2018, page 69).

Advantages and disadvantages

There is bad and good side to phantom income. The bad side is that it can happen to you. On the other hand, you can foist it on a lender who gets a charging order on a member's interest. A charging order on a member is indictable personally, and it only gives a creditor access to the allocate profits to the trade creditors and do not give him any money to pay the taxes on those gains (J.Reuting 2008, page 240).


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References

Author: Edyta Pach