An income tax regime under which a business entity itself is not taxed, but instead all of the entity’s gain and loss is taxed to its owners. Pass-through taxation is a feature of disregard entities that do not select a different tax election, partnerships that do not select a different tax election, and S Corps.

Pass-through taxation frequently though not always results in lower taxes than double taxation. That said, there are many reasons double taxation may be preferred, and this is a decision that should be discussed with the business’s accountant.

A key feature of pass-through taxation is that the owners of a business owe taxes even if they do not receive cash from the entity itself. This possibility is something that owners should plan for in order to avoid owing taxes without having cash on hand for payment.