TAX
Pass-Through Entity
A business whose income passes through to its owners and is taxed on their personal returns rather than at the entity level.
DEFINITION
Sole proprietorships, partnerships, LLCs taxed as partnerships, and S corporations are all pass-through entities. The business itself usually pays no federal income tax — owners report their share of income or loss on their personal returns and pay tax there.
WHEN IT MATTERS
Whenever you're comparing entity types, evaluating the PTE tax election in Wisconsin, or planning around the qualified business income deduction.
COMMON QUESTIONS
Are pass-through entities always more tax-efficient than C corps?
Not always. At higher income levels, or when the business retains a lot of earnings, a C corporation can sometimes be the better answer. The analysis is specific to the owners' situation.
R · RELATED TERMS
TAX
S Corporation
A tax election that lets a corporation or LLC pass income through to its owners' personal tax returns, avoiding double taxation.
TAX
Qualified Business Income (QBI) Deduction
A federal deduction of up to 20% of qualified business income for owners of pass-through entities.
TAX
Wisconsin Pass-Through Entity Tax
An elective state-level tax that pass-through businesses can pay on behalf of their owners, working around the federal $10,000 SALT cap.