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Simple English definitions for legal terms
conduit taxation
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A quick definition of conduit taxation:
Conduit taxation is a way of taxing where the owners of a company or entity are taxed for the income of the entity, instead of the entity itself being taxed. This method is used for partnerships, S corporations, and some limited liability companies. It means that the entity's income "passes through" to the owners, who are then responsible for paying taxes on it. This is different from double taxation, where the same income is taxed twice, once at the entity level and again at the owner level.
A more thorough explanation:
Definition: Conduit taxation is a type of taxation where the entity's owners are taxed for the entity's income without taxing the entity itself. This is also known as pass-through taxation.
Examples: Partnerships, S corporations, limited liability companies, and limited liability partnerships are taxed under this method. For instance, in a partnership, the income earned by the partnership is divided among the partners, and each partner is taxed on their share of the income. The partnership itself does not pay taxes on the income it earns.
Explanation: Conduit taxation allows for the income earned by the entity to be taxed only once, at the individual level, rather than being taxed twice, at both the entity and individual level. This type of taxation is beneficial for small businesses and partnerships as it simplifies the tax process and reduces the tax burden on the entity.