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 35%. 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 IRS concluded that $50,000 of the rent was excessive. Mimeo can only deduct $150,000 instead of $200,000, resulting in an additional $50,000 taxable income. At a 34% tax rate, this increases Mimeo's tax liability by $17,000 (0.34 * $50,000).

Mrs Jansen Is the Sole Shareholder of Mimeo Corporation