In tax terminology, a pass-through entity is a business where the end results of operations “pass through” to the owners and are reported on the owners’ personal tax returns.
Partnerships and S-corporations are both pass-through entities.
Joe the Window Washer runs his business as an S-corporation. At the end of the year, the corporation shows a net profit of $50,000. Joe’s corporation will file an informational tax return, called Form 1120-S, but the corporation itself does not owe taxes on the $50,000. Instead, the $50,000 passes through to Joe, and Joe reports it as income on his personal tax return.
For more tax terms, visit the Glossary page on this website.