If C corporations retain their after-tax earnings (for reasonable business purposes), when will their individual shareholders be taxed on the retained earnings? Multiple Choice Shareholders will be taxed when they sell their shares at a gain. Shareholders will be taxed in the year they elect to be taxed on undistributed retained earnings. Shareholders will be taxed on undistributed retained earnings in the year the corporation files its tax return. None of the choices is correct.
The correct answer is: Shareholders will be taxed when they sell their shares at a gain. In a C corporation, retained earnings are not directly taxed to shareholders unless they are distributed as dividends. If the corporation retains earnings for reasonable business purposes, shareholders are not taxed on those earnings until they realize a gain, such as when they sell their shares at a higher price than they paid. At that point, any gain realized may be subject to capital gains tax.
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