Paula is the sole shareholder of Violet,Inc.For 2014,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2014 is $500,000.On audit,the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?
A)Paula's gross income will increase by $100,000 as a result of the IRS adjustment.
B)Violet's taxable income will not be affected by the IRS adjustment.
C)Paula's gross income will decrease by $100,000 as a result of the IRS adjustment.
D)Violet's taxable income will decrease by $100,000 as a result of the IRS adjustment.
E)None of these is correct.

Question

Quizplus · Accepted Answer

$100,000 of salary is reclassified as a dividend.Thus,Violet's taxable income increases by $100,000 because dividends are not deductible.Paula's gross income remains the same.Her salary income decreases by $100,000,but her dividend income increases by $100,000.

Paula Is the Sole Shareholder of Violet,Inc