Question

Denying the tax deduction to the payor of unreasonable salaries paid to related parties would cause double taxation, since the recipient would be required to report the amount in their income.

a. true
b. false

Answer 1

The statement is false because denying a tax deduction for unreasonable salaries to related parties does not lead to double taxation. The recipient still reports the salary as income and pays taxes accordingly, and the payor does not get to reduce their taxable income with this expense.

Step-by-step explanation:

Denying the tax deduction to the payor of unreasonable salaries paid to related parties does not necessarily cause double taxation. This statement is false. When a salary is paid to an employee, even if it's considered unreasonable, the payor (employer) may not be allowed to deduct this as a business expense, depending on the tax laws. However, this does not mean there is double taxation since the recipient of the salary must still declare it as income and pay taxes accordingly. The concept of denying a deduction for the payor aims to prevent businesses from inflating salaries to related parties simply to reduce taxable income. The recipient reports the income, taxes are levied on this income, and there is no duplicate tax event occurring because the salary cost was not deducted by the business.