Which statement describes S-Corporation taxation?

• A. Profits and losses pass through to the owners' personal tax returns
• B. Requires a separate corporate tax return
• C. Is taxed at the corporate level before owners
• D. Dividends are taxed twice at corporate and personal levels

Answer: (A)

S-Corporation taxation is based on pass-through taxation. The business itself generally isn’t taxed at the corporate level; instead, its profits and losses flow through to the owners, who report them on their personal tax returns and pay taxes at their individual rates. The entity files an informational return to disclose each shareholder’s share, but there is no separate corporate tax burden. This is what prevents double taxation, which is common with C corporations. While some people think in terms of a separate corporate return, the key point is that the tax liability attaches to the shareholders, not to the corporation itself. That’s why profits and losses appearing on owners’ personal returns is the correct description.