Financial Accounting I

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Double taxation

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Financial Accounting I

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

  • 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?
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