While death and taxes may both be certain, taxation is the only one of the two that can happen twice. If you own a business, the last thing you want is to get taxed on your income more than once. Double taxation occurs when a corporation pays taxes on its profits and then its shareholders pay personal taxes on dividends or capital gains received from the corporation. A financial advisor can answer questions about double taxation and help optimize your financial plan to lower your tax liability.

What Is Double Taxation?
Double taxation happens when income tax gets levied twice on the same income. So if you’re a shareholder or owner of a corporation, then you may face double taxation because your income will come from corporate earnings that were already taxed, and you will also pay taxes on them.

The same happens to individual investors who pay taxes on dividends, which are a share of a corporation’s earnings. Because the corporation has already paid taxes on those same earnings, it can also face double taxation. And, if you have income in a foreign country, you may also get taxed twice for the same income in that country and the U.S., depending on the circumstances.

Double taxation can happen in C corporations, where owners or shareholders get taxed separately. Other businesses pass income down to individuals, for them to pay personal tax rates that are levied once.

In 2022, the federal income tax rate on corporate profits was 21%. But as of 2023, the Inflation Reduction Act created the Corporate Alternative Minimum Tax (CAMT), which imposes a 15% minimum tax on large corporations. This applies specifically to corporations with an average annual financial statement income of over $1 billion.

Comparatively, the top marginal individual tax rate for 2023 is 37%. So if a corporation pays the 15% CAMT, and that income gets double-taxed, the combined rate for an individual taxpayer in the top bracket could be 52%.

There are two justifications offered for taxing corporate profits twice. First, the tax on corporate profits is seen as justified because businesses organized as corporations are separate legal entities. Second, levying individual taxes on dividends is seen as necessary to keep wealthy shareholders from paying no income taxes on their gains.

The burden of double taxation is common and significant for corporations and shareholders alike. However, it’s not an inevitable outcome by any means. There are several ways business owners can avoid double taxation altogether or reduce taxes in general.


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