Phantom Tax in partnerships take place when the partnership brings in income only to reinvest the same in activities of the business as opposed to factionalizing the profits. Every partner is taxed on this share of income even though the partnership has not distributed any of its cash to the partners. This can result in problems of cash flow for partners who are trapped in having to pay tax, but have no real cash on their hands. In order to avoid adverse effects of this financial load to partners in the partnership firm, it is important to have understanding of the partnership agreement and plan for the Phantom Tax.

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