Definition
A pass-through entity is a business whose income flows through to its owners' personal returns rather than being taxed at the entity level.
How It Works
Sole proprietorships, partnerships, S-corporations, and most LLCs pass profits and losses to owners, who report them personally. This avoids the double taxation of a C-corp and makes owners eligible for the QBI deduction.
Example
A partnership's annual profit is reported on each partner's personal return in proportion to their ownership, with no separate business-level income tax.
Who It Applies To
Owners of most small and mid-sized businesses.
Watch-Outs
Owners owe tax on their share of profit whether or not it is distributed, and the pass-through entity tax election can help work around the SALT cap.
