Flow-Through Entities: What You Need to Know
What entities are flow-through entities? A flow-through entity is an entity through which income flows to the owners or investors, without being subject to taxation at the entity level. The most common type of flow-through entity is the partnership. Other types of flow-through entities include S corporations, limited liability companies (LLCs), and real estate investment trusts (REITs).
What is the benefit of pass-through entity tax? A pass-through entity is an entity through which income is "passed through" to the owners or shareholders, who then report the income on their personal tax returns. The main benefit of this type of entity is that it allows income to be taxed only once, at the owner or shareholder level. This can be a significant advantage over other types of entities, such as C corporations, which are subject to double taxation (once at the corporate level and again at the shareholder level when dividends are distributed). What states have the pass-through entity tax? There is no federal pass-through entity tax, but some states impose taxes on pass-through entities. The states that currently have a pass-through entity tax are:
-Alabama
-Arizona
-Arkansas
-California
-Colorado
-Connecticut
-Delaware
-Georgia
-Hawaii
-Idaho
-Indiana
-Iowa
-Kansas
-Kentucky
-Maine
-Maryland
-Massachusetts
-Minnesota
-Missouri
-Montana
-Nebraska
-New Jersey
-New Mexico
-New York
-North Carolina
-North Dakota
-Ohio
-Oklahoma
-Oregon
-Pennsylvania
-Rhode Island
-South Carolina
-Tennessee
-Vermont
-Virginia
-Washington
-West Virginia
-Wisconsin
-Wyoming
Do flow-through entities have to file tax returns?
Flow-through entities (FTEs) are business entities that are not subject to federal income tax at the entity level. Instead, the income or losses of the FTE "flow through" to the owners or shareholders, who then report the income or losses on their individual tax returns. FTEs include partnership, limited liability companies (LLCs), and S corporations.
The owners or shareholders of an FTE must file a tax return regardless of whether the FTE had any income or losses during the year. The tax return must include the owner's or shareholder's share of the FTE's income or losses. What is passthrough deduction? The passthrough deduction is a deduction that is available to certain business owners who have income from a pass-through entity, such as a partnership, S corporation, or LLC. The deduction is equal to 20% of the qualified business income from the entity. This deduction can reduce the taxable income of the business owner, and therefore the amount of taxes owed.