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, 2015. How much salary must Turquoise pay Saleh during the period October 1 through December 31, 2015, 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

A personal service corporation must meet the following salary requirements in order to avoid negative tax effects:
1. The corporation must pay its shareholder-employee(s) a reasonable salary for services rendered.
2. The combined total amount of salaries paid to the shareholder-employee(s) during the fiscal year must be at least as much as the corporation's taxable income for that year.
Since Turquoise Corporation paid Saleh a salary of $330,000 during its fiscal year ending September 30, 2015 and there is no indication that Turquoise Corporation has taxable income for that year less than $330,000, the corporation has satisfied the second requirement.
To satisfy the first requirement, Turquoise Corporation must pay Saleh a reasonable salary for services rendered during the period October 1 through December 31, 2015. Assuming Saleh continues to work for Turquoise Corporation during that period, a salary of $82,500 (1/4 of $330,000) would meet the reasonable compensation requirement without running afoul of the second requirement. Therefore, choice C is the correct answer.

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