Firefly Corporation is a C corporation.Freya owns all of the stock.During the current year Firefly earned taxable income of $500,000 and paid a $300,000 dividend to Freya.Which of the following statements is correct?
A)Firefly will pay corporate income tax on its earnings,and Freya will paid individual income tax on the dividends.
B)Only Firefly will pay taxes.Freya will not pay any taxes due to her holdings in Firefly.
C)Firefly's income will flow through to Freya's tax return,and she will pay the taxes on the $500,000 of corporate income.
D)Firefly will not pay any taxes,but Freya will pay taxes on the dividend received.

Question

Quizplus · Accepted Answer

As a C corporation, Firefly is a separate entity from Freya and is subject to corporate income tax on its earnings. Therefore, Firefly will pay corporate income tax on its $500,000 of taxable income. Additionally, when Firefly pays a dividend to Freya, she will be subject to individual income tax on that dividend. This is because dividends are typically classified as ordinary income for tax purposes and are subject to individual income tax. So, Option A is the correct answer.

Firefly Corporation Is a C Corporation