Which concept means business income or loss passes through to owners for tax purposes?

• A. Agency
• B. Duty of loyalty
• C. Apparent authority
• D. Pass-through taxation

Answer: (D)

Pass-through taxation describes how business income or losses are taxed at the owners’ level rather than at the entity level. The entity itself doesn’t pay income taxes; instead, profits and losses flow through to the owners and are reported on their personal tax returns, taxed at their individual rates. This avoids the double taxation that occurs with traditional C corporations, where the entity is taxed and dividends are taxed again at the owner level. Entities like partnerships, LLCs treated as partnerships, and S corporations are designed to use pass-through taxation. The other terms relate to the agency relationship or fiduciary duties and do not describe how income is taxed.