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RR_CPA
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Joined: 02 Mar 2009
Location: Canada
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Posts: 338

Posted: 28 Mar 2009 at 11:05 \| IP Logged

A corporation is a separate legal entity for most purposes. A significant issue is whether it is also separate from its owners for tax purposes. Which of the following statements is true?

a) Certain for-profit corporations may elect to avoid federal income taxation.

b) Corporations file information returns but are not taxpayers.

c) All for-profit corporations pay federal income taxes on their income.

d) If the corporation pays taxes on its income, dividends distributed out of that income are not taxable.

Correct answer is A. Please explain how?

optimistCPA
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Joined: 03 Mar 2009
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Posted: 28 Mar 2009 at 11:14 \| IP Logged

I believe S-Corporations are also considered for-profit corporations. That is what there are referring to in A.

j555
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Joined: 25 Aug 2008
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Posted: 28 Mar 2009 at 13:57 \| IP Logged

OptimistCPA is right. The question is referring to S-Corps who don't pay income tax as an entity, they pass their income through to the shareholders in the form of dividends. The shareholders then report that income on their tax returns, but the S-Corp itself doesn't pay income tax as an entity like a C-Corp does.

RR_CPA
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Joined: 02 Mar 2009
Location: Canada
Online Status: Offline
Posts: 338

Posted: 28 Mar 2009 at 15:08 \| IP Logged

Yes, now it make sense... thanks alot you both

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