Question
Tide Company pays its sole shareholder, Nick Sabar, a salary of $90,000.At the end of each year, the company pays Nick a bonus equal to
Tide Company pays its sole shareholder, Nick Sabar, a salary of $90,000.At the end of each year, the company pays Nick a bonus equal to the difference between the corporations taxable income for the year (before the bonus) and $75,000.In this way, the company hopes to keep its taxable income at amounts that are taxed at either 15% or 25%.This year Tide reported pre-bonus taxable income of $620,000 and paid Nick a bonus of $545,000. On audit, the IRS determined that individuals working in Nicks position earned on average $272,000 per year.The company had no formal compensation policy and never paid a dividend. Assume Nicks marginal ordinary rate is 35% and his rate on dividends is 15%.ReferCorporate tax table. |
a. | How much of Nicks bonus might the IRS recharacterize as a dividend? |
c. | Assuming the IRS recharacterizes $181,500 of Nickss bonus as a dividend, what additional income tax liability does Tide Company face? |
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