Pass-Through Taxation

Pass-through (or flow-through) taxation means the SPV itself is not taxed on its income. A Delaware LLC SPV is treated as a partnership by default, so it files an informational return and allocates each item of income, gain, loss, and deduction to its members, who report their share on their own returns via Schedule K-1. This avoids the double taxation a C corporation would suffer, and it preserves the character of the income, so long-term capital gain stays long-term capital gain in the LP's hands. It also has a consequence LPs sometimes miss: tax can be due on allocated gains in a year when the LP received no cash, which is why some operating agreements provide for tax distributions.