MARK KOHLERMain Street Professionals, Main Street Professionals, Main Street Professionals, Main Street Professionals, Main Street Professionals, LLC · Owner at Main Street Professionals, LLC

Taxed on Money You Didn’t Receive?!

24 Jul 2026 · 1 min

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In this segment, Mark Kohler explains the tax concept of "phantom income" that arises in LLCs or partnerships when the entity shows profit on paper but cash isn’t actually distributed to the partners. He illustrates how differing partner preferences—one wanting to reinvest all profits back into the business and another needing cash to cover the tax liability on their allocated share—can create a conflict. The distribution rules are governed by the operating agreement, and lack of coordination between partners can lead to tax problems because each partner must pay tax on their share of the partnership’s taxable income regardless of whether they receive cash distributions.

Chapters

phantom income, which is a tax problem. Like, one partner may say, I want all the partnership proceeds to go back in the business. I've got income over here, I don't need money from the partnership, so let's just put it back in the partnership. Well, the other partner's like, what the hell? I want some money out of this partnership because we're going to have income attributed to us in this partnership and I got to pay taxes on it. And so when an LLC makes money, it's going to have profit on paper, but whether or not you distribute money is based on the operating agreement. So if one partner says put it all back in and the other partner says take it all out, you're going to have tax problems when you're not coordinated on that.