Which of the following best describes the term "double-taxation"?

Which of the following best describes the term "double-taxation"?

• A. The company pays taxes on its income, then distributes dividends to shareholders which are taxed at the personal level.
• B. The business owner pays federal taxes on a salary, then pays taxes on the remaining income for the business.
• C. A business pays Federal tax based on business income, and pays State tax based on business income.
• D. A corporation pays sales tax on property sold to owners, and pays income tax on business operations.

Answer: (A)

The term "double-taxation" is most accurately described by the situation where a corporation pays taxes on its earnings at the corporate level, and then, when it distributes those earnings to shareholders in the form of dividends, the individual shareholders must also pay taxes on that income at their personal tax rates. This concept highlights how the same income can be taxed twice—first when the company earns the profit and again when those profits are distributed to shareholders. In this context, the first layer of tax occurs on the corporate income, and the second layer occurs when shareholders receive dividends, thereby incurring a personal tax liability. This situation is a significant concern for corporations and their shareholders, as it emphasizes the increased tax burden faced within this structure compared to other business forms, such as partnerships, which typically do not experience this double taxation of income.

The term "double-taxation" is most accurately described by the situation where a corporation pays taxes on its earnings at the corporate level, and then, when it distributes those earnings to shareholders in the form of dividends, the individual shareholders must also pay taxes on that income at their personal tax rates. This concept highlights how the same income can be taxed twice—first when the company earns the profit and again when those profits are distributed to shareholders.

In this context, the first layer of tax occurs on the corporate income, and the second layer occurs when shareholders receive dividends, thereby incurring a personal tax liability. This situation is a significant concern for corporations and their shareholders, as it emphasizes the increased tax burden faced within this structure compared to other business forms, such as partnerships, which typically do not experience this double taxation of income.