Question

Which taxation type is subject to an entity-level Federal income tax leading to double taxation when income is distributed to shareholders?

a) Separate entity, but does not pay tax
b) Reports its income and expenses, computes tax on the taxable income reported on its Form 1120
c) When the entity distributes its income, the shareholders report dividend income on their own tax returns

Answer 1

When the entity distributes its income, the shareholders report dividend income on their own tax returns.

Step-by-step explanation:

The taxation type that is subject to an entity-level Federal income tax leading to double taxation when income is distributed to shareholders is option c) When the entity distributes its income, the shareholders report dividend income on their own tax returns.

This type of taxation applies to corporations that are classified as C corporations. C corporations are separate legal entities from their shareholders, and they pay corporate income taxes on their profits. When the corporation distributes its income to shareholders as dividends, those dividends are also taxed again at the individual shareholder level.

For example, if a C corporation earns $100 in profits and decides to distribute all of it to the shareholders as dividends, the corporation will pay taxes on the $100 at the corporate level. Then, when the shareholders receive the dividends and report them on their own tax returns, they will pay taxes on the received dividends based on their individual tax rates.