Quail Corporation is a C corporation with net income of $300,000 during 2011. If Quail paid dividends of $50,000 to its shareholders, the corporation must pay tax on $300,000 of net income. Shareholders must report the $50,000 of dividends as income.

Question

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C corporations are separate tax-paying entities, meaning they pay income tax on their net income. Dividends paid to shareholders are not deductible expenses for the corporation, so they are paid out of after-tax income. This means that the corporation must pay tax on all of its net income, regardless of whether it distributes any of it as dividends. Shareholders must also report any dividend income they receive on their personal tax returns.

Quail Corporation Is a C Corporation with Net Income of $300,000