Austin is the sole shareholder of Purple,Inc.Purple's accumulated E & P at the beginning of the year is $700,000.Purple's taxable income after paying a salary and bonus to Austin of $100,000 is $500,000.Assume the salary and bonus payment are reasonable.Purple's maximum exposure in calculating accumulated taxable income for purposes of the accumulated earnings tax for the current tax year is:
A)$330,000.
B)$500,000.
C)$600,000.
D)$1,300,000.
E)None of the above.

Question

Quizplus · Accepted Answer

The accumulated earnings tax is imposed on undistributed earnings of corporations that exceed the reasonable business needs of the corporation. In this case, Purple, Inc.'s taxable income after paying a reasonable salary and bonus to Austin is $500,000. Therefore, the accumulated taxable income for the current tax year is $200,000 ($500,000 - $300,000 salary and bonus to Austin). The maximum exposure for Purple, Inc. in calculating accumulated taxable income for the current tax year is the greater of $250,000 or one-third of $700,000, which is $233,333. Therefore, the answer is A) $330,000, which is the lesser of $200,000 and $330,000.

Austin Is the Sole Shareholder of Purple,Inc