Mrs. Jansen is the sole shareholder of Mimeo Corporation. She also owns the office building that serves as corporate headquarters. Last year, Mimeo paid $200,000 annual rent to Mrs. Jansen for use of the building. Mimeo's marginal tax rate was 21% and Mrs. Jansen's marginal tax rate on ordinary income was 37%. The revenue agent who audited Mimeo's return concluded that the fair rental value of the office building was $150,000. Compute the net impact of this audit conclusion on Mimeo's income tax liability.

Question

Quizplus · Accepted Answer

The audit conclusion reduces the deductible rent expense by $50,000 ($200,000 paid - $150,000 fair value). This increases Mimeo's taxable income by $50,000, resulting in an additional tax liability of $10,500 ($50,000 x 21%).

Mrs Jansen Is the Sole Shareholder of Mimeo Corporation