Acorn Corporation is publicly traded on the American Stock Exchange. Its chief executive officer, Carl, currently receives an annual salary of $1 million. The board of directors is considering increasing his compensation by $200,000.
a. What are the income tax consequences to Acorn if Carl’s salary is increased to $1,200,000?
b. What alternatives might be considered to increase Carl’s annual compensation that would produce more favorable tax consequences for Acorn?