How are business entities taxed according to the business entity principle?

• A. All profits are taxed collectively
• B. Each business entity is taxed separately
• C. Entities are exempt from taxes
• D. Taxation depends on the ownership structure

Answer: (B)

The business entity principle emphasizes that businesses are separate legal entities from their owners and that they should be accounted for independently. This principle ensures that the financial transactions of a business are distinct from those of its owners or any other entities. As a result, each business entity is required to file its own tax returns and pay taxes on its earnings separately from its owners' personal taxes.

This approach avoids the commingling of personal and business revenues and expenses, providing a clearer picture of the entity’s financial status. The tax obligations for corporations, partnerships, and sole proprietorships differ, but all are taxed based on their operational income as standalone entities. Thus, the correct understanding of taxation according to the business entity principle is that each business entity is taxed separately, reflecting its own profitability and tax liability independent of the owners' financial situations.