Question

Why are partnerships and S corporations called flow-through entities?

Are there any changes to flow through entity taxation for 2018 and beyond under the new tax law?

Have there been any significant changes to the IRS process of auditing a partnership recently?

Where did you find your information?

Answer 1

Answer: A flow-through entity refers to a legal business entity which passes income on to the investors and/or owners of the business. These act as a common device for limiting the taxation by avoiding double taxation and dividend tax. Only the owners or investors are taxed on revenues, not the entity itself. As partners in the partnerships reports all their business income in their personal income tax return; the business itself is not taxed separately; thus are categorised as flow-through entities. Similarly S corporations have flow of profits through to shareholders who report their income on Schedule E of their personal income tax, thus are called flow-through entities.