Saleh, an accountant, is the sole shareholder of Turquoise Corporation, a C corporation. Turquoise is a personal service corporation with a fiscal year ending September 30 (pursuant to a § 444 election). The corporation paid Saleh a salary of $330,000 during its fiscal year ending September 30, 2014. How much salary must Turquoise pay Saleh during the period October 1 through December 31, 2014, if the corporation is to continue to use its fiscal year without negative tax effects?
A) $0
B) $27,500
C) $82,500
D) $247,500
E) None of the above

Question

Quizplus · Accepted Answer

Since Turquoise is a personal service corporation, there are special rules regarding the reasonable compensation that must be paid to the shareholder-employee. In general, the compensation must be reasonable for the services performed, and failure to meet this requirement can result in the loss of the corporation's status as a personal service corporation.

In this case, Saleh was paid $330,000 during the fiscal year ending September 30, 2014. Assuming this amount was reasonable, Turquoise must continue to pay Saleh a reasonable amount of compensation for the remainder of the year in order to maintain its status as a personal service corporation.

Since there are three months remaining in the year (October, November, and December), Saleh must be paid at least 25% of his total compensation for the year, or $82,500 (25% x $330,000), during this period in order to meet the reasonable compensation requirement. Therefore, the correct answer is C) $82,500.

Saleh, an Accountant, Is the Sole Shareholder of Turquoise Corporation