Question

Discuss the different types of flow-through entities reported on Schedule E, such as partnerships, S corporations, LLCs, trusts, and estates?

Answer 1

A flow through entity is one whihc passes incomes directly to the owners of the entity i.e.e its investors and shareholders. The entity is not taxed and incomes are taxed only once in the hands of owners or investors. This is done to avoid double taxation.

Types of flow through entities:

* Sole Proprietorship - This is a business owned by a single person. The owner reports all the business income in personal tax return.

* Partnership - Tax return is files at entity level, but profits are taxed in the hands of the partners and not at the entity level.

* S Corporation - S corporations like partnerships have profits taxed in their hands. S Corporations have less than or equal to 100 shareholders.

* Limited Liability Company - LLC can elect to be taxed as partnerships and hence profits will be taxed in their hands.

* Income Trusts - In a trust a beneficiary pays the tax amount and not the trust itself.