What type of tax is imposed on a corporation's earnings before it is distributed to shareholders?

The correct answer is corporate income tax, which is a tax levied on the profit that a corporation makes before any distributions, such as dividends, are made to its shareholders. This tax affects the corporation at the entity level, meaning that it has to pay tax on its earnings regardless of whether those profits are distributed or retained for reinvestment.

Corporations must file their tax returns and report their taxable income, which is calculated by subtracting allowable expenses from total revenue. The corporate income tax is typically imposed at a federal level, and in some cases, at state and local levels as well, which illustrates the importance of understanding the overall tax obligations a corporation faces.

In contrast, personal income tax applies to individual taxpayers, taxing personal income rather than corporate earnings. Sales tax is a consumption tax imposed on the sale of goods and services, while capital gains tax relates to the taxation of profits from the sale of assets or investments but does not apply to earnings generated by corporations as a whole before distribution. Understanding these distinctions helps clarify why corporate income tax specifically pertains to a corporation's earnings prior to any distributions to shareholders.