What is the process of double taxation for stockholders in a C corporation?

• A. The corporation pays income tax on its earnings, and then shareholders pay personal income tax on dividends received from those after-tax earnings.
• B. Shareholders pay tax on both the corporation's gross revenue and their personal dividend income.
• C. The corporation pays tax on dividends before distributing them, but shareholders do not pay any additional tax on dividends received.
• D. Shareholders pay tax only when they sell their stock at a gain, and the corporation is not taxed on its earnings.

Answer: (A)

Verified step by step guidance

1. Understand the concept of double taxation: Double taxation occurs when the same income is taxed twice—once at the corporate level and again at the individual level.
2. Step 1: Recognize that a C corporation is a separate legal entity. It pays corporate income tax on its earnings, which is the first level of taxation.
3. Step 2: After the corporation pays taxes on its earnings, it may distribute dividends to its shareholders. Dividends are paid from the corporation's after-tax earnings.
4. Step 3: Shareholders who receive dividends must report them as personal income and pay personal income tax on these dividends. This is the second level of taxation.
5. Step 4: Note that double taxation does not involve taxing the corporation's gross revenue directly to shareholders, nor does it exempt shareholders from paying taxes on dividends received. It specifically refers to the taxation of corporate earnings and the subsequent taxation of dividends.