Double taxation occurs when the same income is taxed twice at different levels, such as corporate earnings taxed at both the corporate and shareholder levels. This is common in C corporations where profits are taxed first as corporate income and then again as personal income when distributed as dividends.
5 Must Know Facts For Your Next Test
Double taxation primarily affects C corporations.
Corporate profits are first subjected to corporate income tax.
After distribution of dividends, shareholders pay personal income tax on these dividends.
Double taxation does not apply to S corporations which pass income directly to shareholders.
Strategies like retaining earnings or increasing debt financing can be used to mitigate double taxation.
Review Questions
How does double taxation impact C corporation shareholders?
What are two ways corporations might try to avoid double taxation?
Why doesn't double taxation apply to S corporations?
Related terms
C Corporation: A business structure where the company is taxed separately from its owners.
S Corporation: A corporation that passes its income directly to shareholders, avoiding double taxation.