Pipeline Theory

What Is the Pipeline Theory?

The pipeline theory supports that an investment firm that gives all returns to clients ought not be taxed like normal companies. Capital gains, interest, and dividends as returns are key concepts to figure out the pipeline theory. The pipeline theory is likewise alluded to as the conduit theory.

Figuring out the Pipeline Theory

In the event that an investment firm passes income straightforwardly to the investors, those investors are then taxed as people. This means that investors are now taxed once on their income. Taxing the investment company what's more would be similar to taxing a similar income two times.

According to this point of view, companies passing all capital gains, interest, and dividends to their shareholders are viewed as conduits, or pipelines. As opposed to really delivering goods and services in the manner that normal corporations do, these companies act as investment conduits, going through distributions to the shareholders and holding their investments in a managed fund. Along these lines, the primary purpose of these companies is to be a conduit, or a pipeline, for achieving certain tax advantages.

At the point when distributions to shareholders are made, the firm passes untaxed income straightforwardly to the investors. Taxes are just paid by the investors who bring about income tax on the distributions. This proposes that investors in these types of firms ought to just be taxed once on similar income, in contrast to in ordinary companies. Ordinary companies will see double taxation on both the income of the company and afterward income on any distributions paid to shareholders, which is an issue of significant discussion.

Types of Pipeline Companies

Mutual Funds

Most mutual funds qualify as regulated investment companies, which gives them pipeline status and expects them to be exempt from taxes at the corporate level. Mutual funds register as regulated investment companies to benefit from these tax exemptions. Fund accountants act as the primary managers of fund tax expenses. Regulated investment companies that are exempt from taxes have the benefit of lower annual operating expenses for their investors. Funds will remember subtleties for their tax-exempt status in their mutual fund reporting archives.

Different Companies

Notwithstanding mutual funds, different types of companies that may likewise be viewed as pipeline companies incorporate limited partnerships, limited liability companies, and S-corporations. These companies are exempt from income taxes.

Real estate investment trusts (REITs) likewise have special provisions that permit them to be taxed as partial pipeline companies. Generally speaking, REITs are permitted to deduct the dividends they pay to shareholders, decreasing their taxes paid through the deduction.

Features

• Ordinary companies will see double taxation on both the income of the company and afterward income on any distributions paid to shareholders, which is an issue of impressive discussion.
• On the off chance that an investment firm passes income straightforwardly to the investors, those investors are then taxed as people; taxing the investment company what's more would be similar to taxing a similar income two times, as indicated by the pipeline theory.
• The pipeline theory supports that an investment firm that gives all returns to clients ought not be taxed like ordinary companies.