What is pass-through taxation?
A. Pass-through taxation is a type of taxation that results when a corporation has elected a special tax status, S corporation status, with the Internal Revenue Service (IRS). This special tax status eliminates the possibility of double taxation common to C corporations. With S corporations, a corporate income tax return is filed but no tax is paid at the entity level. Instead, the profits or losses of the S corporation are passed-through to the shareholders and are reported on their individual tax returns.
This type of taxation allows gains, losses, deductions and credits from certain forms of businesses to be reported on the individual tax returns of the owners or other members, rather than on a separate form for the business. This may prevent double taxation, so that the same income is not subject to a corporate tax when the business entity earns it and again to a personal income tax when it is paid to owner through a salary or dividends.
Pass-through taxation is a type of taxation that results when a corporation has elected a special tax status, S corporation status, with the Internal Revenue Service (IRS). This special tax status eliminates the possibility of double taxation common to C corporations. With S corporations, a corporate income tax return is filed but no tax is paid at the entity level. Instead, the profits or losses of the S corporation are passed-through to the shareholders and are reported on their individual tax returns. Top of page What are authorized shares of stock? S corporations must indicate the number of shares of stock they wish to authorize (and a par value associated with each share) in the articles of incorporation. The number of authorized shares is the total number of shares available for an S corporation to issue to shareholders; however the S corporation does not need to issue the total number of authorized shares.
Pass-through taxation is the type of taxation which generally applies to partnerships. This means that the partnership, itself, is not directly taxed, and the tax burden is instead passed on to the partners. Thus, the partnership pays its profit earnings to the partners as income, wages and profit payments, and each partner pays the taxes on their individual share of those profits. Similarly, if the partnership took a loss for the year, each partner can deduct their share of that loss from their personal tax return. This is the same type of taxation that applies to a sole proprietorship, and to most limited liability companies (unless they elect to be subject to the double taxation that generally applies to corporations). This pass-through taxation is particularly advantageous for smaller businesses because (a) the final tax burden may be less then it would be with double taxation and (b) it is often easier to handle.
