Pass-Through Versus Disregarded Entity Taxation

By Jason Watson, CPA
Posted Saturday, August 3, 2024

This will be a quick section. A disregarded entity is just that, disregarded for tax purposes. All the activities will be reported directly on your Form 1040 tax return as if the entity doesn’t exist. You will get this with single-member LLCs and multi-member LLCs between married couples in community property states should they elect as such.

A pass-through entity (PTE) has a separately prepared and filed tax return, but does not generally pay taxes at the federal level (there are some rules when C Corps elect to be taxed as S Corps). Rather, the activities are reported on a K-1 and that resulting information is pulled into your Form 1040 tax return on Schedule E Page 2, and other schedules and forms depending on the data reported. For example, capital gains, depreciation, interest income, among other things within the pass-through entity’s activities are considered separate items on a K-1. If interest income is earned within the PTE, this will be reported directly on Schedule B on your 1040.

PTEs and disregarded entities have two things in common. First, the ultimate handling of the tax effects and calculations are done on your Form 1040 tax returns. Second, the state might impose a franchise tax or some other related fee or tax on the entity; this is where a slight diversion occurs. PTEs will pay this state level tax directly within its state return, and disregarded entities will pay as part of the state tax return filed as a person.