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Corporations are generally subject to federal income tax on their taxable income, when earned, and shareholders are generally subject to federal income tax on the receipt of dividend distributions from corporations, but only when such distributions are actually made. In the case of a corporation meeting certain criteria, the Internal Revenue Code offers the option of electing “S corporation” status, under which the corporation is generally not subject to federal income tax, but the shareholders are subject to tax on a “pass-through” basis at the time the corporation earns income, regardless of whether the income is distributed to them. The income of an S corporation is thus generally taxed currently to all of its shareholders, including qualified pension trusts and charitable organizations that would otherwise be exempt from income tax.

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