What is pass-through taxation in the context of partnerships?

Pass-through taxation is a mechanism that allows the income earned by a partnership to be taxed directly at the individual partners' tax rates, rather than at the entity level. This means that the partnership itself does not pay income taxes. Instead, the profits or losses "pass through" to the individual partners, who report this income on their personal tax returns. This approach avoids the double taxation that typically occurs in corporations, where income is taxed at both the corporate level and again at the individual level when dividends are distributed.

Each partner’s share of the partnership’s income is taxed according to their individual tax rate, which can result in a lower overall tax burden compared to a corporation. This structure is particularly appealing for many small businesses and entrepreneurs because it simplifies tax obligations and allows for more favorable treatment of income.