Pass-Through Income
Definition
Business income that "passes through" to the owner's personal tax return rather than being taxed at the corporate level. Sole proprietorships, partnerships, S corporations, and LLCs are common pass-through entities. The Tax Cuts and Jobs Act introduced a 20% qualified business income (QBI) deduction for many pass-through income earners, subject to income and business type limitations.
Example
If your S corporation earns $200,000 in profit, that income passes through to your personal return. You may be able to deduct 20% ($40,000) through the QBI deduction, effectively taxing only $160,000.