What is a pass-through entity and how does it work

Quick answer: A "pass-through entity" (PTE) is a business structure — like a partnership or S corporation — where the business itself normally doesn't pay income tax. Instead, the profits "pass through" to the owners, who report and pay tax on that income on their own individual returns.

Explanation:

The documents I have don't include a general definition of pass-through entities themselves (they focus on state-level PTE tax elections, which are a workaround some states created), but the concept can be pieced together from those charts:

• Normally, income earned by a partnership or S corporation flows through to the owners' personal tax returns, which is why states without an individual income tax — like Texas, Florida, Washington, and Tennessee — have no need for a special PTE election. For example, Texas offers no such election because there is no individual income tax generating a SALT-cap problem at the state level.¹

• To address a federal issue where owners of pass-through businesses lost some benefit of deducting state taxes on their personal returns (the "SALT cap"), many states created an elective entity-level tax. This lets the business itself pay state tax and the owners exclude that income, effectively shifting the tax from the individual level to the entity level. For instance, Louisiana allows pass-through entities to elect entity-level taxation (owners then exclude the income); after the 2024 reform, the electing entity pays the flat individual rate (3% for 2025+).² Similarly, Georgia's HB 149 election lets S corporations and partnerships pay entity-level tax at the individual flat rate (5.19% in 2025, stepping down with the general rate); owners exclude the income.³

• States without an individual income tax simply don't need this mechanism. As the Texas chart notes, the franchise tax applies to the entity regardless⁴ — meaning Texas taxes pass-through businesses through its own franchise tax system, separate from any individual income tax concern.

What it depends on:

• Whether your business is a partnership, S corporation, sole proprietorship, or another entity type
• Which state(s) the business operates in and whether that state offers a PTE election
• Whether the federal SALT cap and related PTE elections still apply to your situation, since Public Law 119-21 (the One Big Beautiful Bill Act, enacted July 4, 2025) changed significant parts of federal tax law — the documents here don't confirm how PTE elections are treated federally for 2025–2026, so that should be verified

Because the tax treatment of a pass-through entity depends heavily on your specific business structure, state of operation, and current federal rules, it's worth speaking with a CPA to confirm how these rules apply to your situation.