Accredited Wealth Management Advisor Practice Exam

If a corporation has net profits of $100,000 and distributes $50,000 as dividends, how much is its taxable income?

1. $0

2. $100,000

3. $50,000

4. $25,000

The correct answer is: $100,000

To determine the taxable income of the corporation, it’s important to recognize that taxable income is generally defined as the total income the corporation generates, minus allowable deductions before any distributions, such as dividends, are taken into account. In this instance, the corporation has net profits of $100,000, which is effectively its taxable income before considering the dividends distributed to its shareholders. The distribution of dividends—$50,000 in this case—does not reduce the taxable income of the corporation. Instead, dividends are paid out of net profits after the corporation has calculated its taxable income. Therefore, the taxable income remains at the original net profit figure of $100,000, and the amount of dividends distributed is not relevant for calculating taxable income directly. Thus, the taxable income for the corporation, given it made profits of $100,000, is indeed $100,000. The option indicating this amount is correct, reflecting the fundamental accounting principle that dividends do not impact the taxable income calculation for the corporation itself.