Question

Tom own 100% of GHI, Inc. In 2007 Tom's sixteen-year-old son worked for GHI and was paid $10,000 per month. Another sixteen-year-old worked for GHI during the summer and performed essentially the same duties as Tom's son This worker was paid $2,000 per month. How much may GHI properly deduct each month for amounts paid to Tom's son?

Answer 1

GHI, Inc. may deduct $8,000 per month for the amount paid to Tom's son.

Step-by-step explanation:

GHI, Inc. can properly deduct $8,000 per month for the amount paid to Tom's son.

Tom owns 100% of GHI, Inc., so any payments made to his son can be considered as a distribution of profits from the company. However, the payment of $10,000 per month to Tom's son is excessive compared to the payment of $2,000 per month to the other worker performing essentially the same duties. It is important to ensure that payments to related parties are reasonable and in line with market rates. In this case, the appropriate amount to deduct for Tom's son would be $8,000 per month, which is the difference between $10,000 and $2,000.

It is crucial for businesses to adhere to fair and reasonable compensation practices to avoid any potential legal or tax issues.