Cathy is the President and sole shareholder of Boxer, Inc., a regular corporation. The corporation reported taxable income of $435,000 after deducting Cathy's $800,000 salary. If the IRS disallowed $550,000 of the salary as unreasonable compensation, the corporation's regular income tax will change by a:

Question

Quizplus · Accepted Answer

DIf the IRS disallows $550,000 of Cathy's salary as unreasonable, that amount is added back to the corporation's taxable income, increasing it from $435,000 to $985,000. The corporation's tax liability increases because it pays corporate income tax on the higher income. The difference in tax due to the disallowed salary portion depends on the corporate tax rate. Assuming a flat corporate tax rate of 21% (applicable under the Tax Cuts and Jobs Act for years after 2017), the increase in tax would be 21% of $550,000, which equals $115,500. This results in an increase in the corporation's regular income tax, not a decrease.

Cathy Is the President and Sole Shareholder of Boxer, Inc