Flow-through

A financial term primarily used in accounting and taxation, 'flow-through' refers to the direct allocation of income, expenses, losses, and credits from a business entity (typically a partnership, limited liability company, or S corporation) to its owners or investors. This means the entity itself doesn't pay taxes on these items; instead, the tax obligations 'flow through' to the individual or corporate owners based on their ownership percentage. The concept is designed to avoid double taxation, a situation where profits are taxed at the corporate level and again when distributed to shareholders. This system ensures that the entity's financial results directly impact the owners' tax returns, simplifying the tax process and fostering investment in smaller or less-traditional businesses. The degree to which income or loss 'flows-through' is determined by legal and investment agreements.

Flow-through meaning with examples

• As a real estate investment trust (REIT), the firm allows profits from rental properties to 'flow through' directly to its shareholders, avoiding corporate taxes and providing investors with predictable income and advantageous tax treatment. This model attracts many seeking passive real estate returns, capitalizing on the efficiency of the 'flow-through' structure.
• The partnership's financial structure is designed to facilitate a 'flow-through' of research and development costs. This approach enables the investors to claim deductions against their other income, significantly reducing their overall tax liability and making the venture more attractive financially.
• The investors in the venture were pleased to find that the company was set up in a way that permitted the tax losses to 'flow-through' directly onto their tax returns, thus reducing their taxable income for the year and leading to considerable savings.
• After a successful funding round, the company reorganized as an LLC, setting up a 'flow-through' system so that the earnings from their product sales would directly impact the net profit or loss of each individual member of the company
• The investors in the renewable energy project appreciated the company's use of a 'flow-through' structure. It meant that certain tax credits and deductions associated with the project would effectively 'flow through' to them, providing considerable financial benefits.