Question

If XYZ Corporation is a shareholder of BCD Corporation, how many levels of tax is

BCD's before-tax income potentially subject to? Has Congress provided any tax relief for
this result? Explain.

Answer 1

BCD Corporation's before-tax income is subject to double taxation because it is taxed at the corporate level and then again at the shareholder level. Congress provides tax relief through the Tax Cuts and Jobs Act and a dividends received deduction for corporations.

Step-by-step explanation:

BCD Corporation's before-tax income is potentially subject to two levels of tax: the corporate level and the shareholder level. This double taxation occurs because the corporation first pays tax on its earnings, and then, when these earnings are distributed as dividends to shareholders, the shareholders pay taxes on these distributions.

Congress has provided some tax relief for this double taxation. The Tax Cuts and Jobs Act, enacted in December 2017, reduced the corporate income tax rate from 35% to 21%. Additionally, qualified dividends received by individual shareholders are taxed at a lower rate than ordinary income, which alleviates some of the burden of double taxation.

When XYZ Corporation owns shares in BCD Corporation, it may be eligible for a dividends received deduction (DRD), which allows corporations receiving dividends from other corporations to deduct a portion of those dividends from their taxable income, subject to certain criteria. This provides some relief from the potential double taxation.