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 Mrs.Jansen's income tax liability.

Question

Quizplus · Accepted Answer

The net impact of the audit conclusion is a $9,800 decrease in Mrs. Jansen's income tax liability. This is because the IRS will disallow the $50,000 of rent that Mimeo paid to Mrs. Jansen, which will increase Mimeo's taxable income by $50,000. This will result in an additional $17,000 of taxes for Mimeo. However, Mrs. Jansen will be able to deduct the $50,000 of rent on her personal tax return, which will reduce her taxable income by $50,000. This will result in a tax savings of $19,800 for Mrs. Jansen. The net impact of the audit conclusion is therefore a $9,800 decrease in Mrs. Jansen's income tax liability.

MrsJansen Is the Sole Shareholder of Mimeo Corporation