Your Guide to Pass-Through Tax Benefits
Understand the value packed into your Partnership or S Corp K-1.
The Power of Pass-Through
The primary benefit of a Partnership or S Corp is avoiding "double taxation." Unlike a C Corp, the business itself pays no income tax. Instead, profits, losses, deductions, and credits are "passed through" to you, the owner, to report on your personal tax return.
C Corporation (Taxed Twice)
🏢 Business Earns Profit
⬇
⬇
💸 Shareholder Receives Dividend
⬇
Pass-Through Entity (Taxed Once)
🏢 Business Earns Profit
⬇
📈 Profit "Passes Through" via K-1
⬇
🧑 Owner Reports Profit
⬇
Turn Business Losses into Personal Savings
If your business has a loss (K-1 Box 1 or 2), you can often deduct it from your other personal income (like wages), reducing your total taxable income. See how it works below.
New Taxable Income:
$75,000
Benefit From Favorable Income Types
Not all income is taxed the same. Your K-1 passes through certain types of gains that are often taxed at lower rates than ordinary income. Click the cards to learn more.
Net Long-Term Capital Gain
(K-1 Box 9a)
Lower Tax Rates
Gains from assets held over a year are typically taxed at 0%, 15%, or 20%—often much lower than regular income tax rates.
Net Section 1231 Gain
(K-1 Box 10)
The Best of Both Worlds
Net §1231 gains are treated as long-term capital gains (lower rates), while net §1231 losses are treated as ordinary losses (fully deductible against any income).
Supercharge Your Deductions with Section 179
One of the most powerful pass-through benefits is the Section 179 deduction (K-1 Box 12). It allows you to expense the full cost of equipment in one year instead of depreciating it slowly over several years. Use the slider to see the difference.
*Based on a 5-year straight-line depreciation for comparison.
Tax Credits: A Dollar-for-Dollar Benefit
Tax credits, passed through on your K-1 (Box 15 or 13), are more powerful than deductions. A credit reduces your tax bill directly, dollar for dollar.
$1,000 Deduction
Reduces your taxable income.
👇
Tax Savings at 24% bracket:
$240
$1,000 Tax Credit
Reduces your final tax bill.
👇
Tax Savings:
$1,000
Receiving Tax-Free Cash
Distributions (K-1 Box 19 or 16d) are often a tax-free return of your investment ("basis"). You generally don't pay tax on money you take out of the company until you've withdrawn your entire investment.
Your Basis (Investment)
➡️
Tax-Free Distribution
