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A "flow-through entity" is so named because its earnings flow directly to the people who own the business. There are an estimated 488,000 "flow-through entities" in Florida, and almost all escape the state's corporate income tax.
Congress began enacting flow-through provisions in the federal tax code years ago to allow small business owners to avoid paying taxes twice - once on their business profits and a second time on their personal income tax returns.
A flow-through business - unlike a traditional corporation, or C corporation - is taxed only once, on its owners' personal income tax returns.
Since Florida's tax code mirrors the federal code, the same rules apply here - with one significant difference. Florida does not have a personal income tax, so the owners of flow-through businesses don't have to pay one.
That costs the state an estimated $760-million to $910-million a year in possible tax revenue.
The cost seems sure to mount. Increasingly, large businesses are converting to "flow-through" status to get the tax exemption that Congress and the Legislature intended for small businesses.
Of the estimated 488,000 flow-through businesses in Florida:
** An estimated 372,000 are Subchapter S corporations. An S corporation can have up to 75 shareholders who report income on their personal tax returns.
** An estimated 38,000 are limited liability companies, a type of business that did not exist when the Florida corporate income tax was enacted in 1971. Lawyers and other professionals often use this business structure to get some protection from lawsuits.
** An estimated 78,000 are partnerships, unincorporated businesses owned by two or more people.