A NEW INCOME

A New Income Q&A

Q: S corp shareholder taxed on "phantom income" distribution?

I am a shareholder of a company registered in New York. Each year, I get a Schedule -1 1120S form stating the profit/loss of my share, for that year. For the profit years, I never received any actual cash nor stock distribution from the profit. All the profit were "supposedly" reinvested back to the company. Is it true that I am still obligated to file my "phanton income" in my personal tax return,even that I never received a single penny? If it's true, I really don't think it's fair. Is there anyway to prevent paying tax on these "phantom income"?

A: since a S corp cannot legally retain any earnings there should be no "phantom income" The S corp files a form 1120S and a K1 showing to the IRS each shareholders % of profit or loss. If you have a portion of the gain or loss reported to you on a K1, you include that amount of Schedule E of your tax return. A C corp can retain any amount of it's earnings, a S corp can not retain any earnings at the end of the tax year. since the K1 is filed with IRS showing your share of profit or loss, you must show that amount on your tax return.

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