SolveYourProblem
Article Series: Taxes
Help Me Understand My Taxes
What
Is Phantom Income and its Tax Issues?
There are many people that have heard of phantom
income, but they may not understand exactly what that is, who
is affected by it, and what steps can be taken in order to
remedy the situation. The idea of phantom income comes
from the basis that this is an allotment of money that an individual
does not necessarily see, but that which is taxed. It is reportable
on a person’s taxes as a piece of the person’s income, but
that individual may not actually see the cash flow associated
with the reported income. There are certain examples of this
that can be listed. For example, a very general type of phantom
income would be income that is received from zero coupon bonds.
These are bonds that are sold at a deep discount when it is
compared to the face value on the bond. This bond appreciates
in value over time, when it finally reaches its face value.
There
are also many businesses that complain about having
to deal with phantom income, in that they need to pay taxes
on income that the individuals have not actually received at
the time during which the taxes are due. This is frustrating
for these individuals. These people are typically owners and
partners who have limited liability corporations and S-corporations.
There is taxable income that passes through the corporations
and goes into the hands of the owners. These owners are responsible
for paying all of the taxes on the income. This is different
when compared to corporations, because in those cases the corporation
is the taxpayer, not the individual business owners. The individuals
that own the corporation do not need to pay taxes on the phantom
income then.
There
are several different causes when it comes to phantom income. Some of the simplest explanations include that there
is a discrepancy between when the cash is received as opposed
to when the amount is actually paid. There is also a limit
of how much a business can get deducted. This includes 50%
of meals and their entertainment, as well as any fines and
penalties, which are all considered non-deductible. Principle
repayments on certain debts of a company are non-deductible
as opposed to the interest, which is considered to be deductible.
The principle payment is not allowed to be deducted because
the company is simply returning the borrowed money to the financial
institution.
There
are certain remedies that a company can implement in
order to try to combat phantom income for the business. Some
of these are more effective than other methods, but all of
them are helpful in subtle ways. While some companies are able
to adopt all methods, some can only adopt one of two, but the
important thing is that every little bit can help the companies
and business owners when it comes to paying taxes on the phantom
income.
It should be encouraged that employees and business owners
should minimize the amount of expenses they incur that are
considered to be non-deductible. It is also important that
the individuals in charge stay aware of the debt that they
are amassing. This is important because it helps to keep track
of the interest and how much money cannot be deducted, that
being the principle sum. Many companies can also benefit from
working with accountants to help them stay aware of the methods
that the company is using and in order to stay ahead on different
financial matters that the company is involved in throughout
the year. It is important to occasionally review the accounting
methods that are used in order to ensure that the company is
using the most effective methods.
# # # # #
SolveYourProblem.com : 2007
> Home > Tax
Articles: Main Page
|
