What is Pass-through Taxation?
Pass-through taxation is taxation in which the taxpayer does not directly pay taxes to the government. Taxes are paid on LLC income by owners after it passes through the business. Profits and losses pass through to owners, who report that income on personal tax returns. This system avoids double taxation and simplifies filing.
Pass-through taxation has benefits as it avoids double taxation of corporate income. Losses and costs are deducted from owners’ personal taxes, with tax rates based on individual levels. Single-member LLCs default to sole proprietorship tax status while multi-member LLCs default to partnership status. In both cases, pass-through taxation applies.
Pass-through Taxation for LLC
Pass-through taxation means LLC owners pay taxes directly, rather than the LLC itself. Profits and losses pass through to owners, helping to avoid double taxation and simplify filing processes. Most entities use pass-through income, offering significant tax savings for small businesses. Any number of people can form an LLC, and income taxes are paid based on individual rates.
How Pass-through Income Works
Pass-through taxation means LLC owners pay taxes, not the LLC itself. Profits and losses pass through to owners, avoiding double taxation and simplifying filing processes. Losses and costs deduct from owners’ personal taxes, with tax rates based on individual levels. Some entities can reduce taxes with a 20% deduction, subject to limitations based on income type and amount.