What entities are subject to corporate double tax? How can this be avoided?
The concept of “pass-through entity’s attribution” stems from the fact that this entity’s ownership can be attributed to another entity. The IRS Code prescribes that pass-through entities’ income belongs to that other entity. A pass-through entity earns the income but is not responsible to pay the tax related to this income. In effect, the pass-through entity’s income and related tax liability pass through to the entity having ownership. Examples are estates, LLCs, partnerships, S Corporations, and trusts.
First, a regular-Corporation pays federal and state income taxes on its taxable income. Next, the shareholder pays income tax on their dividends. Since shareholders feel that it takes corporate taxable income to pay dividends, taxable income and dividend income are one and the same. It appears to shareholders that the same income is taxed twice. This is the reason why shareholders feel that this is a case of double taxation. Avoidance: The IRS Code prescribes that pass-through entities’ taxable income and related tax liability belongs to the taxable entity that has ownership. Therefore, a pass-through entity’s taxable income and liability pass through to its owners. Pass-through entities pay no income tax. The owner pays income tax only once. Examples of pass-through entities are LLCs, partnerships, S Corporations, and sole-proprietorships.