Pass-through entities offer a distinct tax advantage over traditional C-corporations. They are not required to pay federal taxes at the entity level. Instead, each owner must report their share of the business profits, losses, and other tax items on their individual tax returns. This prevents double taxation, a common concern for business owners, where income is taxed at both the corporate and individual levels.
While pass-through entities escape federal taxation, it’s important to note that some states impose taxes on pass-through entities doing business within their jurisdiction. For instance, California has an annual franchise tax with a minimum payment of $800. Additional taxes and fees may also apply based on the company’s income or activities.
For a deeper understanding of what “doing business” in California means, check out our prior newsletter, Understanding the Tax Implication of Conducting Business in California.
Understanding Your Tax Obligations as a Pass-Through Entity
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