Tax glossary

Pass-Through Entity

Pass-Through Entity — what it means, how it works, and a real example, explained without the jargon.

What is Pass-Through Entity?

A pass-through entity is a business that doesn't pay income tax itself — the profits "pass through" to the owners, who report them on their personal returns.

How it works

Sole proprietorships, partnerships, S corporations, and most LLCs are pass-throughs. The business files an informational return, issues each owner a share of the profit, and the owners pay the tax at their individual rates. This avoids the double taxation C corporations face.

A quick example

A two-partner LLC earns $200,000. It pays no entity tax; each partner reports $100,000 on their own return and pays tax at their personal rate.

What people get wrong

Pass-through owners often qualify for the 20% QBI deduction, which can shave a fifth off the business income before it's taxed. Don't leave it unclaimed.

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Frequently asked questions

What does Pass-Through Entity mean?

A pass-through entity is a business that doesn't pay income tax itself — the profits "pass through" to the owners, who report them on their personal returns.

How does Pass-Through Entity work?

Sole proprietorships, partnerships, S corporations, and most LLCs are pass-throughs. The business files an informational return, issues each owner a share of the profit, and the owners pay the tax at their individual rates. This avoids the double taxation C corporations face.

What's the most common mistake with pass-through entity?

Pass-through owners often qualify for the 20% QBI deduction, which can shave a fifth off the business income before it's taxed. Don't leave it unclaimed.