The portion of a shareholder-employee's salary that is classified as unreasonable has no effect on the amount of a shareholder-employee's gross income, but results in an increase in the taxable income of the corporation.

Question

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If a portion of a shareholder-employee's salary is classified as unreasonable, it is not deductible as an expense by the corporation and therefore increases the taxable income of the corporation, but it does not affect the shareholder-employee's gross income.

The Portion of a Shareholder-Employee's Salary That Is Classified as Unreasonable