Part Two of a series about Taxing Businesses
A C corporation is subject to the corporate income tax. While the income from business structures like S corporations, partnerships, LLC’s and sole proprietorships are taxed under the individual income tax and therefore not subject to the corporate tax code.
However, when owners want to extract income from a C corp, they are subject to a second level of taxation, either though taxes on dividends payments or through a capital gains tax on the sale of their share of the business.
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Double Taxation: Scenario I
A C corp first pays taxes on their profits through the corporate tax code then distribute dividends to their owners. These dividends are taxed through the owner's individual income tax.
Double Taxation: Scenario II
C corporation pays taxes on their profits through the corporate tax code then owners pay tax on capital gains from sale of their stock shares (or the business itself)
Double Taxation: Scenario I and II
A comparison of the two options available to corporate owners to extract income from the corporation (dividends payments vs through sale of shares). During 1950s, 1960s, 1970s and parts of the 30s, 80s, and 90s, the tax code favored the owners who paid taxes on long-term capital gains. Since 2002, the effective rate for these two options mirrored each other.
- Federal Income Tax Rates - Citizens for Tax Justice (through 2012)
- Tax Topics - Topic 409 Capital Gains and Losses (recent data)
- Federal Individual Income Tax: Exemptions and Treatment of DividendsIncome Years 1913-2006 (historical rates)
- Publication 17 (2016), Your Federal Income Tax (check for more recent rate)
- Corporate Top Tax Rate and Bracket | Tax Policy Center (with download of excel file)
- Questions and Answers on the Net Investment Income Tax (For ACA)
Article by Visualizing Economics