What is pass-through tax?

Pass-through tax refers to tax arrangements permitted to sole proprietorships, partnerships, and S corps. Under this arrangement, businesses are not directly taxed at the federal level; instead, all profits are “passed through” to the shareholders. Shareholders then pay taxes on a personal basis. Pass-through tax arrangements reduce the overall tax burden on the shareholder due to the corporation not paying income tax, therefore increasing the amount of profit given to the shareholders.

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