WGU D558
PASS-THROUGH TAXATION
Comprehensive Study Guide
Partnerships • S Corporations • Basis • Allocations • Distributions
Loss Limitations • Dispositions • Compliance • Worked Problems
2026 EDITION
,WGU D558 • PASS-THROUGH TAXATION
How to Use This Guide
This original guide is designed for WGU D558 - Pass-Through Taxation. It explains the federal tax architecture of
partnerships and S corporations, then turns the rules into repeatable calculation methods. Read Chapters 1-4 first, because
entity classification, separately stated items, and basis drive nearly every later topic. Then work the examples without
looking at the solution.
Scope and tax-year caution
Tax concepts are grounded in IRS materials available through August 9, 2026. Dollar thresholds, phaseouts, filing
relief, and recently enacted provisions can change by tax year. When a problem supplies a tax year or threshold,
use that fact pattern. This guide emphasizes durable mechanics and flags items that require current-year
verification.
High-yield learning sequence
Phase Focus Evidence of mastery
1. Architecture Entity classification, flow-through model, Can distinguish entity-level computation from owner-level reporting
tax forms
2. Basis engine Outside basis, stock basis, debt basis, Can roll basis forward in the correct order
liability shares
3. Transactions Contributions, allocations, distributions, Can determine recognition, character, and ending basis
sales
4. Limitations Basis, at-risk, passive, excess business Can apply limitation layers sequentially
loss
5. Integration Mixed partnership and S corporation Can reconcile K-1 items, distributions, and suspended losses
cases
Contents
1. Pass-Through Tax Framework
2. Entity Classification and Formation
3. Partnership Operations and Allocations
4. Partnership Basis and Liabilities
5. Partnership Distributions
6. Sales, Exchanges, and Terminations
7. S Corporation Eligibility and Elections
8. S Corporation Operations and Shareholder Basis
9. S Corporation Distributions and Corporate-Level Taxes
10. Loss Limitations and Section 199A
11. Compliance, Ethics, and Tax Research
12. Integrated Worked Problems
13. Final Review, Formula Sheet, and Glossary
2026 Study Guide | 2
, WGU D558 • PASS-THROUGH TAXATION
1. Pass-Through Tax Framework
The governing idea
A pass-through entity generally computes taxable items at the entity level but does not pay the regular federal income tax
imposed on those items. Instead, owners report their distributive or pro rata shares whether or not cash is distributed. The
entity files an information return and gives each owner a Schedule K-1. The owner then places each item on the appropriate
individual or entity return schedule.
Core distinction
Allocation creates taxable income or deduction. A distribution moves cash or property. An owner may owe tax on
allocated income without receiving enough cash to pay it; conversely, a distribution may be tax-free because it is
a recovery of basis.
Entity comparison
Feature Partnership / LLC taxed as partnership S corporation C corporation
Federal return Form 1065 Form 1120-S Form 1120
Owner report Schedule K-1; distributive share Schedule K-1; pro rata share Dividend reporting
when paid
Allocation Substantial economic effect / partner-interest Generally per share, per day; one class of Not applicable
flexibility rules stock
Owner debt Liability share can increase outside basis Corporate debt does not increase stock No pass-through basis
basis; direct shareholder loan may create effect
debt basis
Compensation Partner generally not an employee; Shareholder-employee must receive Shareholder-employee
guaranteed payments possible reasonable compensation wages
Distribution Often nonrecognition with substituted basis Appreciated property generally triggers Corporate gain plus
property rules corporate gain possible shareholder
dividend
Separately stated items
Items are separately stated when their tax treatment depends on an owner's circumstances. Combining them into ordinary
business income would destroy character or prevent owner-level limitations from operating.
• Capital gains and losses; section 1231 items.
• Charitable contributions and portfolio income.
• Tax-exempt income and nondeductible expenses.
• Credits, foreign tax items, investment interest information, and section 179 expense.
• Guaranteed payments in partnerships and other items requiring distinct owner-level treatment.
2026 Study Guide | 3
PASS-THROUGH TAXATION
Comprehensive Study Guide
Partnerships • S Corporations • Basis • Allocations • Distributions
Loss Limitations • Dispositions • Compliance • Worked Problems
2026 EDITION
,WGU D558 • PASS-THROUGH TAXATION
How to Use This Guide
This original guide is designed for WGU D558 - Pass-Through Taxation. It explains the federal tax architecture of
partnerships and S corporations, then turns the rules into repeatable calculation methods. Read Chapters 1-4 first, because
entity classification, separately stated items, and basis drive nearly every later topic. Then work the examples without
looking at the solution.
Scope and tax-year caution
Tax concepts are grounded in IRS materials available through August 9, 2026. Dollar thresholds, phaseouts, filing
relief, and recently enacted provisions can change by tax year. When a problem supplies a tax year or threshold,
use that fact pattern. This guide emphasizes durable mechanics and flags items that require current-year
verification.
High-yield learning sequence
Phase Focus Evidence of mastery
1. Architecture Entity classification, flow-through model, Can distinguish entity-level computation from owner-level reporting
tax forms
2. Basis engine Outside basis, stock basis, debt basis, Can roll basis forward in the correct order
liability shares
3. Transactions Contributions, allocations, distributions, Can determine recognition, character, and ending basis
sales
4. Limitations Basis, at-risk, passive, excess business Can apply limitation layers sequentially
loss
5. Integration Mixed partnership and S corporation Can reconcile K-1 items, distributions, and suspended losses
cases
Contents
1. Pass-Through Tax Framework
2. Entity Classification and Formation
3. Partnership Operations and Allocations
4. Partnership Basis and Liabilities
5. Partnership Distributions
6. Sales, Exchanges, and Terminations
7. S Corporation Eligibility and Elections
8. S Corporation Operations and Shareholder Basis
9. S Corporation Distributions and Corporate-Level Taxes
10. Loss Limitations and Section 199A
11. Compliance, Ethics, and Tax Research
12. Integrated Worked Problems
13. Final Review, Formula Sheet, and Glossary
2026 Study Guide | 2
, WGU D558 • PASS-THROUGH TAXATION
1. Pass-Through Tax Framework
The governing idea
A pass-through entity generally computes taxable items at the entity level but does not pay the regular federal income tax
imposed on those items. Instead, owners report their distributive or pro rata shares whether or not cash is distributed. The
entity files an information return and gives each owner a Schedule K-1. The owner then places each item on the appropriate
individual or entity return schedule.
Core distinction
Allocation creates taxable income or deduction. A distribution moves cash or property. An owner may owe tax on
allocated income without receiving enough cash to pay it; conversely, a distribution may be tax-free because it is
a recovery of basis.
Entity comparison
Feature Partnership / LLC taxed as partnership S corporation C corporation
Federal return Form 1065 Form 1120-S Form 1120
Owner report Schedule K-1; distributive share Schedule K-1; pro rata share Dividend reporting
when paid
Allocation Substantial economic effect / partner-interest Generally per share, per day; one class of Not applicable
flexibility rules stock
Owner debt Liability share can increase outside basis Corporate debt does not increase stock No pass-through basis
basis; direct shareholder loan may create effect
debt basis
Compensation Partner generally not an employee; Shareholder-employee must receive Shareholder-employee
guaranteed payments possible reasonable compensation wages
Distribution Often nonrecognition with substituted basis Appreciated property generally triggers Corporate gain plus
property rules corporate gain possible shareholder
dividend
Separately stated items
Items are separately stated when their tax treatment depends on an owner's circumstances. Combining them into ordinary
business income would destroy character or prevent owner-level limitations from operating.
• Capital gains and losses; section 1231 items.
• Charitable contributions and portfolio income.
• Tax-exempt income and nondeductible expenses.
• Credits, foreign tax items, investment interest information, and section 179 expense.
• Guaranteed payments in partnerships and other items requiring distinct owner-level treatment.
2026 Study Guide | 3
