CPA LogoCPA Exam Prep

Pass-Through Taxation

Allocation of Income and Loss

Unlike C corporations, S corporations generally do not pay federal income tax on ordinary business income. Instead, taxable items are allocated to shareholders, who report them on their individual income tax returns.

Tip
Always distinguish items that are separately stated from those included in ordinary business income.
Summary
Pass-through taxation avoids entity-level taxation while preserving the character of many tax items.