Pass-through entity

The business itself generally pays no federal income tax. It files a return, and each owner gets a Schedule K-1 showing their share of the income, deductions and credits. The owners pay tax on those shares whether or not any cash is paid out. S corporations and partnerships are the main pass-through entities.

An LLC’s income is taxed to its owners unless it elects to be taxed as a C corporation. With two or more members, it is a partnership by default and files Form 1065. A single-member LLC is disregarded by default. The IRS treats its business as the owner’s own, so its income goes straight onto the owner’s return.

A C corporation is the opposite case. It pays 21% on its own taxable income, and its shareholders pay tax again on dividends. For the capital gain rules, the tax code also counts estates, trusts, REITs and regulated investment companies as pass-through entities.

Owners of pass-through businesses may deduct up to 20% of their qualified business income under Section 199A, subject to limits. From 2026, an owner with at least $1,000 of that income from businesses they actively run gets at least $400. The deduction no longer has an end date.

A pass-through entity tax (PTET) is something else: a state tax that a partnership or S corporation elects to pay itself. Because the entity pays it, the tax can stay outside the federal cap on each owner’s state and local tax (SALT) deduction. Each state that offers one sets its own election and rate.