Accredited Wealth Management Advisor Practice Exam

How is net income from an S corporation taxed?

1. C corporation tax rates.

2. S corporation tax rates.

3. Partnership entity tax rate.

4. Personal tax rate of the individual shareholders.

The correct answer is: Personal tax rate of the individual shareholders.

Net income from an S corporation is taxed at the personal tax rate of the individual shareholders. This is due to the nature of S corporations, which are classified as pass-through entities for tax purposes. This means that the income generated by the S corporation is not taxed at the corporate level. Instead, the income is passed through to the shareholders, who report it on their personal tax returns. Each shareholder pays tax on their share of the S corporation's income at their individual tax rates, which can vary based on their overall taxable income and tax bracket. This structure allows for potentially lower overall tax liability compared to a C corporation, where profits are taxed at the corporate level and may also be subjected to taxation when distributed as dividends to shareholders. Thus, option D accurately reflects the taxation process for individual shareholders of an S corporation.