Question

Double taxation of a corporation occurs because the company pays tax on _____ and then individual shareholders pay income tax on the dividends they receive.

1) profits
2) revenue
3) assets
4) liabilities

Answer 1

Double taxation takes place when a corporation pays federal corporate income taxes on its profits and then shareholders face personal income taxes on the dividends they receive from those profits.

Step-by-step explanation:

Double taxation of a corporation occurs because the company pays tax on profits and then individual shareholders pay income tax on the dividends they receive. Corporations are considered separate legal entities and must pay federal corporate income taxes on the profits they earn.

This is the third-largest source of federal tax revenue. After a company pays these taxes on its profits, it may distribute some of the remaining profits to its shareholders in the form of dividends. The shareholders then pay personal income taxes on these dividends, which constitutes the second layer of taxation, hence the term double taxation.