Double taxation is experienced by corporations that pay dividends. Which of the following scenarios is an accurate example of double taxation?
A) If Idle Time Gaming, 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, Idle Time Gaming, 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 Idle Time Gaming, 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 Idle Time Gaming, 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

Double taxation refers to the taxation of both the corporation's earnings and the earnings received by the stockholders in the form of dividends. Scenario A accurately describes this concept, as the earnings are taxed first as corporate income and then again as individual earnings for each stockholder. Choices B, C, and D do not accurately describe double taxation.

Double Taxation Is Experienced by Corporations That Pay Dividends