Which of the following statements is true regarding the tax liability of C corporations?

• A. C corporations are taxed as pass-through entities, similar to partnerships.
• B. C corporations are not required to pay federal income tax; only shareholders are taxed on dividends.
• C. C corporations are taxed separately from their owners, and profits may be subject to double taxation.
• D. C corporations' profits are taxed only once at the shareholder level.

Answer: (C)

Verified step by step guidance

1. Understand the concept of C corporations: C corporations are a type of business entity that is taxed separately from its owners. This means the corporation itself is responsible for paying federal income taxes on its profits.
2. Learn about double taxation: C corporations may face double taxation because profits are taxed at the corporate level first, and then any dividends distributed to shareholders are taxed again at the individual level.
3. Compare C corporations to pass-through entities: Unlike partnerships or S corporations, which are pass-through entities where income is taxed only at the individual level, C corporations do not pass their income directly to shareholders for tax purposes.
4. Clarify the incorrect statements: The statement that C corporations are taxed as pass-through entities is incorrect because they are taxed separately. Similarly, the claim that C corporations are not required to pay federal income tax is false, as they are obligated to pay taxes on their profits.
5. Identify the correct statement: The correct statement is that C corporations are taxed separately from their owners, and profits may be subject to double taxation. This aligns with the tax structure of C corporations as defined by the Internal Revenue Code.