Double taxation

Definition

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

1. Double taxation primarily affects C corporations.
2. Corporate profits are first subjected to corporate income tax.
3. After distribution of dividends, shareholders pay personal income tax on these dividends.
4. Double taxation does not apply to S corporations which pass income directly to shareholders.
5. Strategies like retaining earnings or increasing debt financing can be used to mitigate double taxation.

Review Questions

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.

Dividends:

A portion of a company's earnings distributed to its shareholders.