Evan is the sole shareholder of Magic Roofing Company, a calendar year S corporation. Although Evan spends at least 30 hours per week supervising Magic's employees, he has never drawn a salary from Magic. Magic has existed for five years and has earned a profit every year. Evan withdraws $50,000 of cash from the S corporation each year. 1. Explain the tax consequences of Evan's cash withdrawals from the S corporation and their impact on Evan's taxable income and Magic's ordinary income. Evan's cash withdrawal from the S corporation is not taxable to him, and the payment is not deductible by the S corporation. For taxation purposes, S corporations are pass-through entities, which means that profits, credits, and deductions are distributed to shareholders. Nevertheless, shareholders who work for the firm must have fair remuneration (wage) before any payouts. This guarantees the correct payment of payroll taxes. The IRS is watchful in this regard to stop tax evasion through income misclassification. As for Evan's withdrawal, $50,000 from the last five years is considered salary