Question

1. Explain a flow-through entity. How many times is flow-through entity income taxed, who pays the tax, and what is the tax rate.

2. Discuss corporate taxable income and the concept of double-taxation. Who pays the first level and at what tax rate? Who pays the second level of tax and at what tax rate?

Answer 1

Q1. A flow-through entity is a legal business entity that passes income on to the owners and/or investors of the business. Flow-through entities are a common device used to limit taxation by avoiding double taxation. Only the investors or owners are taxed on revenues, not the entity itself.

Flow- through businesses include sole proprietorships, partnerships, and S corporations. Partnerships: Partnerships file an entity-level tax return (Form 1065), but profits are allocated to owners who report their share of net income on Schedule E of their individual tax returns.

Pass-through businesses pay lower tax rates than C-corporations. Corporate income is often taxed twice:- once at the entity level with a top marginal rate of 35 percent, and again on the individual level when profits are distributed to shareholders as dividends (with a top rate of 23.8 percent).

Answer 2 - Corporate Taxable income is the amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year. It is generally described as adjusted gross income (which is your total income, known as “gross income,” minus any deductions or exemptions allowed in that tax year).

Double taxation is a tax principle referring to income taxes paid twice on the same source of income. It can occur when income is taxed at both the corporate level and personal level. Double taxation also occurs in international trade or investment when the same income is taxed in two different countries. There are two types of double taxation: jurisdictional double taxation, and economic double taxation. In the first one, when source rule overlaps, tax is imposed by two or more countries as per their domestic laws in respect of the same transaction, income arises or deemed to arise in their respective jurisdictions.

First Level - Single filers who have less than $9,700 taxable income are subject to a 10% income tax rate (the minimum bracket).

Second Level - Single filers who earn more than this amount have their first $9,700 in earnings taxed at 10%, but their earnings past that cutoff point and up to $39,475 are subjected to a 12% rate, the next bracket.