Entities With a Special Tax Regime

A handful of entities sit outside the sole-prop/partnership/S/C lattice entirely, each with a purpose-built regime in the Code that swaps ordinary entity-level tax for conduit treatment — provided the entity meets strict income and distribution tests. You will meet most of these as an investor instead of a founder, but the mechanics decide how the income reaches you and what it is taxed as.

REIT –- the real-estate conduit.

A Real Estate Investment Trust (REIT) under IRC §§856–859, “Real estate investment trusts” escapes entity-level tax by distributing at least 90% of its taxable income to shareholders each year and holding at least 75% of its assets in real estate. The cost of the conduit is that most REIT dividends are classified as ordinary income instead of qualified dividends — though IRC §199A grants a 20% deduction on that ordinary portion, with no wage test or income limit, one of the cleanest pass-through deductions left (section “Constructing a Portfolio”).

RIC –- the fund conduit.

A Regulated Investment Company (RIC) under IRC §§851–855, “Regulated investment companies” is the wrapper inside virtually every mutual fund and ETF. Meet the diversification and 90%-distribution tests and the fund pays no entity-level tax; income and gains flow through to shareholders and keep their character — qualified dividends stay qualified, long-term gains stay long-term. This conduit is why a fund can hold thousands of securities without stacking a second layer of tax on top (section “The Structural Obsolescence of Mutual Funds in Taxable Accounts”).

HOA –- the homeowners association.

A Homeowners Association (HOA) can elect under IRC §528, “Certain homeowners associations” to file the one-page Form 1120-H, which exempts its exempt-function income (member dues and assessments) and taxes only non-member income — interest, facility rentals, laundry — at a flat 30%. Filing a regular Form 1120 instead offers lower graduated rates but exposes the dues to tax. Most associations elect 1120-H every year for the simplicity and the audit safety.

Political organization.

A IRC §527, “Political organizations” organization — a campaign committee, PAC, or super PAC — is tax-exempt on the contributions it raises for political activity and taxed (on Form 1120-POL) only on its investment income. It is the rare entity whose core receipts are exempt while its passive earnings are not.

Cooperative.

A cooperative under IRC §§1381–1388, “Cooperatives and their patrons” — agricultural, retail, or utility — deducts the patronage dividends it returns to its member-patrons, collapsing its own tax to near zero and taxing the income once, in the patrons’ hands.

The through-line: each regime grants a single layer of tax in exchange for surrendering retained earnings — the entity must distribute to keep its conduit status. Tax-exempt charities and other IRC §501(c), “Exemption from tax on corporations, certain trusts, etc.” organizations sit one step further out, paying no tax on mission income at all but owing the unrelated-business-income tax (UBTI) on any commercial activity unrelated to their exempt purpose (chapter “Charity” covers the donor side).