Paula is the sole shareholder of Violet, Inc.For 2012, she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2012 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 increase by $100,000 as a result of the IRS adjustment.
E)None of the above is correct.

Question

Quizplus · Accepted Answer

The IRS adjustment reclassifies $100,000 of Paula's salary as a dividend, which is not deductible for Violet, Inc. This increases Violet's taxable income by $100,000.

Paula Is the Sole Shareholder of Violet, Inc