Before Paying Salaries to Its Two Shareholders,Steamboat Corporation Has Net

Essay

Before paying salaries to its two shareholders,Steamboat Corporation has net income of $640,000 during the year ($1,200,000 revenue - $560,000 operating expenses).Dean and Mary are equal shareholders of Steamboat and work in similar jobs as employees of the corporation.Steamboat pays each shareholder-employee a salary of $320,000,which results in zero taxable income for the corporation.On audit,an IRS agent determines that $40,000 of the amount paid to each of the shareholders is unreasonable compensation.The shareholders' tax adviser has told them that the IRS agent is probably correct in his determination.What effect will the IRS agent's finding have on the taxable income of Dean,Mary,and Steamboat Corporation?