Flow-through entity
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A flow-through entity (FTE) is a legal entity where income "flows through" to investors or owners; that is, the income of the entity is treated as the income of the investors or owners. Flow-through entities are also known as pass-through entities or fiscally-transparent entities. Depending on the local tax regulations, this structure can avoid dividend tax and double taxation because only owners or investors are taxed on the revenue. Technically, for tax purposes, flow-through entities are considered "non-entities" because they are not taxed; rather, taxation "flows-through" to another tax return.
Common types of FTEs are general partnerships, limited partnerships and limited liability partnerships. In the United States, additional types of FTE include S corporations, income trusts and limited liability companies.
Most countries require an FTE (or its owners) to file an annual return reporting the shares of income allocated to owners, and to provide each owner with a statement of allocated income to enable owners to report their shares of income on their own tax returns. In the United States, the statement of allocated income is known as form K-1 (or Schedule K-1).
United States
According to CNN Money, In the United States, most "businesses are set up as pass-throughs, not corporations" which "means their profits are passed through to the owners, shareholders and partners, who pay tax on them on their personal returns under ordinary income tax rates."[1]
Tax Cuts and Jobs Act of 2017
On December 2, 2017 the U.S. Senate passed a tax overhaul bill that reduced taxes on pass-through business income by allowing them to "deduct 23% of their income."[1] The Senate added features to the bill to prevent abuse.[1]
Kansas (2013 - 2017)
Starting in 2013, Kansas Governor Sam Brownback's undertook what was described by The Atlantic in a June 2017 article as the United States' "most aggressive experiment in conservative economic policy".[2] From 2013 to 2017, 300,000 businesses as pass-through income entities, benefited from the complete tax exemption. [T]ens of thousands of Kansans were able to "claim their wages and salaries as income from a business rather than from employment."[3] Brownback's tax overhaul created pass-through income tax exemptions as well as trimming income tax, eliminating some corporate taxes.[2] From 2013 to 2017, Kansas experienced budget shortfalls culminating in a $350 million budget shortfall in February 2017 which "threatened" "the "viability of the State's "schools and infrastructure".[2] In response, in June 2017 the drastic tax cuts were rolled back to 2013 levels.[2]
See also
References
- ^ a b c Sahadi, Jeanne (December 2, 2017). "Here's what's in the Senate tax bill - and how it differs from the House's bill". CNN Money. Retrieved December 3, 2017.
The House bill dropped the top income tax rate to 25% from 39.6%, while prohibiting anyone providing professional services (e.g., lawyers and accountants) from taking advantage of the lower rate. It also phases in a lower rate of 9% for businesses that earn less than $75,000. The Senate bill lowers taxes on filers in pass-throughs by letting them deduct 23% of their income, up from 17.4% originally. The 23% deduction would be prohibited for anyone in a service business -- except those with taxable incomes under $500,000 if married ($250,000 if single). Prevent abuse of pass-through tax break: If the owner or partner in a pass-through also draws a salary from the business, that money would be subject to ordinary income tax rates. But to prevent people from recharacterizing their wage income as business profits to get the benefit of the pass-through deduction, the Senate bill would automatically limit the deduction to half of the W-2 wages of the pass-through entity or its share to the individual taxpayer. The W-2 rule would not apply, however, if the filer's taxable income is under $500,000 if married, $250,000 if single.
- ^ a b c d Berman, Russell (June 7, 2017). "The Death of Kansas's Conservative Experiment". The Atlantic. Retrieved June 7, 2017.
Republicans in the state legislature on Tuesday voted to reverse Governor Sam Brownback's signature tax cuts, dealing a blow to the kind of fiscal policy the Trump administration wants to enact nationally.
- ^ Max Ehrenfreund (February 22, 2017), "Republicans' 'real-live experiment' with Kansas's economy survives a revolt from their own party", The Washington Post, retrieved February 25, 2017
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