Pass-Through Entity
What is a pass-through entity?
A pass-through entity is a business whose income is reported on its owners' tax returns instead of being taxed at the entity level. Sole proprietorships, partnerships, and S corporations are commonly treated this way, depending on how they are set up.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that keeps entity income, owner pay, and distributions recorded separately, so each owner's reporting is supported.
What to keep in mind
- Owners are taxed on their share of income, even if cash is not distributed
- Owner pay and distributions should be recorded in separate accounts, see draw vs distribution
- Some owners may be eligible for the QBI deduction
Why it matters for service firms
Owners sometimes owe tax on income they have not taken out as cash. Planning cash for taxes, and keeping clean records of income and distributions, avoids unpleasant surprises.
Frequently asked questions
Does a pass-through entity pay tax?
Generally the owners report the income on their returns, though some entities and states have their own taxes and filing requirements. Ask your tax professional how your entity and state are treated.
Which structures can be pass-through entities?
The IRS lists structures such as sole proprietorships, partnerships, S corporations, and LLCs. How each is taxed depends on how it is set up, so confirm with a tax professional.
Official source: IRS: Business structures.
This page is for informational purposes only and does not constitute formal legal or tax advice. Always consult a qualified tax professional about your specific situation.
Related terms and guides: partnership, sole proprietorship, LLC, and C corporation.