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 34% and Mrs.Jansen's marginal tax rate on ordinary income was 39.6%.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 - $150,000), increasing Mimeo's taxable income by $50,000. At a 34% tax rate, this results in a $17,000 increase in tax liability ($50,000 * 34%).

MrsJansen Is the Sole Shareholder of Mimeo Corporation