Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary.The IRS classifies $100,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Aaron's gross income by
$100,000 and increase Pigeon's gross income by $100,000.

Question

Quizplus · Accepted Answer

The reclassification of $100,000 as unreasonable compensation would not decrease Aaron's gross income by $100,000. Instead, it would increase Pigeon, Inc.'s taxable income by $100,000 because the IRS would disallow that portion of the salary as a deductible business expense for Pigeon, Inc. Aaron's gross income would remain the same because he still received the $300,000 as compensation.

Aaron, a Shareholder-Employee of Pigeon, Inc