double taxation
When corporate income is taxed twice — first at the corporate level and again when profits are distributed as dividends to shareholders who pay personal income tax.
Example
“C-corporations face double taxation — paying 21% corporate tax on profits, then shareholders pay again on dividends received.”
Memory Tip
DOUBLE TAXATION = corporate profits taxed TWICE. Company pays tax, then shareholders pay on dividends.
Why It Matters
Double taxation affects how much profit you actually keep when you own stock in a corporation. Understanding this concept helps you make better investment decisions and comprehend why some business structures are more tax-efficient than others for building wealth.
Common Misconception
Many people think that only large corporations experience double taxation, but it applies to any corporation that pays dividends, regardless of size. Additionally, some believe that the tax burden is split evenly between the corporation and shareholders, when in reality the total tax impact depends on specific tax rates.
In Practice
A corporation earns 1 million dollars and pays 21 percent corporate tax, leaving 790,000 dollars. When this is distributed as dividends to shareholders, those individuals pay personal income tax of 15 to 20 percent on the 790,000 dollars, resulting in a final amount of roughly 632,000 to 671,500 dollars, meaning the original profit faced combined taxation rates exceeding 30 percent.
Etymology
DOUBLE (twice) TAXATION. The same income is TAXED TWICE — once at the company, once at the shareholder.
Common Misspellings
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Related Terms
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See Also
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