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, 2016. How much salary must Turquoise pay Saleh during the period October 1 through December 31, 2016, 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 Corporation is a personal service corporation, there is a requirement to pay the owner-manager a reasonable compensation for the services provided. In this case, Saleh was paid a $330,000 salary for the fiscal year ending September 30, 2016. To avoid negative tax effects, Turquoise Corporation must continue to pay Saleh a reasonable salary during the period October 1 through December 31, 2016.

One way to determine what is a reasonable salary is to look at industry standards, years of experience, expertise, and responsibilities of the owner-manager. Assuming that Saleh's services are valued similarly in the last quarter of 2016 as they were for the full fiscal year ending September 30, 2016, we can prorate the annual salary over the remaining 3 months.

$330,000 / 12 months = $27,500 per month

$27,500 x 3 months = $82,500

Therefore, Turquoise Corporation must pay Saleh a salary of $82,500 during the period October 1 through December 31, 2016, to remain within the standard of reasonable compensation for personal service corporations.

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