Double taxation is experienced by corporations that pay dividends. Which of the following scenarios is an accurate example of double taxation?
A) If Game Guys, Inc. distributes 20% of its net profit after taxes to its stockholders, these funds will be taxed again, when each individual stockholder claims his/her portion as earnings.
B) By law, Game Guys, Inc. is permitted to tax its executive employees twice on their earnings, and then pass those funds on to its stockholders in the form of dividends.
C) Due to the fact that it is a corporation, the accountants of Game Guys, Inc. calculate 35% of the company's earnings, multiply it by 2, and then distribute that amount to the federal government each year for taxes.
D) If Game Guys, Inc. fails to pay its taxes on time during any given year, it must pay the current year and the delinquent year, in order to stay in business, similar to being taxed two times.

Question

Quizplus · Accepted Answer

The corporation is a separate entity, and as such, it pays its own taxes on its earnings. If there are earnings after taxes, the corporation may distribute these after-tax funds to its stockholders (owners) in the form of dividends. However, the stockholders must then claim the dividends as income on their individual tax returns. A portion of the firm's earnings (the dividend portion) may be taxed twice. This constitutes double taxation.

Double Taxation Is Experienced by Corporations That Pay Dividends