Question

Which of the following statements is most correct? Question 14 options: Retained earnings, as reported on the balance sheet, represents the amount of cash a company has available to pay out as dividends to shareholders. 70% of the interest received by corporations is excluded from taxable income. 70% of the dividends received by corporations is excluded from taxable income. Because taxes on long-term capital gains are not paid until the gain is realized, investors must pay the top individual tax rate on that gain. The corporate tax system favors equity financing, as dividends paid are deductible from corporate taxes.

Answer 1

The answer is: 70% of the dividends received by corporations is excluded from taxable income.

Step-by-step explanation:

The percentage of received dividends a corporation can exclude from taxable income varies depending on the percentage of shares it owns from the other company's shares outstanding.

• If corporation A owns < 20% of corporation B, it can exclude 70% of received dividends form taxable income.
• If corporation A owns < 80% of corporation B, it can exclude 75% of received dividends form taxable income.
• If corporation A owns ≥ 80% of corporation B, it can exclude 80% of received dividends form taxable income.

This is done to avoid double taxation, but individual investors can't do this.