Accredited Wealth Management Advisor Practice Exam

Which type of tax rate applies to the net income from an S corporation?

1. Corporate tax rate.

2. Income tax rate of the shareholders.

3. Flat tax rate for all S corporations.

4. Variable state tax rates.

The correct answer is: Income tax rate of the shareholders.

The net income from an S corporation is subject to the income tax rate of its shareholders. This is because S corporations are pass-through entities, meaning that they do not pay corporate income tax at the corporate level. Instead, the income, deductions, credits, and other tax attributes flow through to the shareholders, who then report this income on their individual tax returns. Each shareholder pays tax on their share of the S corporation's income at their applicable individual income tax rates. This structure allows for tax advantages, such as avoiding double taxation that is often seen with C corporations, where income is taxed at both the corporate and individual levels when distributed as dividends. Understanding this pass-through taxation is key for advisors when considering the impacts of different business entities on their clients' tax situations.