Final answer:
Income and deductions from partnerships and S corporations are indeed taxed on the owners' personal tax returns rather than on the entity's tax return, which is True. Both are considered pass-through entities avoiding direct federal income taxation, instead, profits and losses are reported by the individual owners.
Step-by-step explanation:
The statement that income and deductions from a partnership or S corporation are taxed on the owners' tax returns rather than the entity tax return is True. Partnerships and S corporations are known as pass-through entities. This means that profits and losses pass through to the individual owners and are included on their personal tax returns. The entities themselves do not pay federal income taxes. Instead, they file an informational return that reports the income, deductions, and other financial activities to the IRS.
For partnerships, each partner pays taxes on their share of the income; the business itself does not have to face corporate income taxes. Likewise, S corporations allow income to pass through to shareholders, who then report the income on their personal tax returns. This structure helps avoid the issue of double taxation seen in C corporations, where income is taxed both at the corporate level and as dividends to shareholders. The larger the profit of the business, the more taxes the owners will be responsible for on their personal tax returns, but the S corporation or partnership itself is not directly taxed on its profits.