Pass-Through Income
What Is Pass-Through Income?
Pass-through income is business income that passes directly to the owners of a business rather than being taxed at the business level. The owners report the income on their personal tax returns.
This type of income is common for certain business structures such as sole proprietorships, partnerships, S corporations, and some limited liability companies (LLCs).
Why It Matters
Pass-through income avoids the double taxation that occurs when corporate profits are taxed at both the corporate level and again when distributed to shareholders.
This structure is widely used by small businesses and entrepreneurs.
How Pass-Through Income Works
A business calculates its profit or loss and reports it to the owners.
The owners then report their share of the income on their individual tax returns.
The income is taxed at the individual tax rate rather than at a separate corporate tax rate.
Example
If a partnership earns $100,000 in profit and has two equal partners, each partner may report $50,000 of pass-through income on their personal tax return.
Pass-Through Income vs Corporate Income
- Pass-through income is taxed at the owner level.
- Corporate income is taxed at the business level and may also be taxed again when distributed as dividends.
FAQs About Pass-Through Income
Which businesses use pass-through taxation?
Sole proprietorships, partnerships, S corporations, and some LLCs.
Do owners pay taxes on pass-through income?
Yes. Owners report the income on their personal tax returns.
Does pass-through income avoid corporate taxes?
Generally yes, because profits are taxed only once at the owner level.
Related Terms
