Question

Bonnie and Clyde each own one-third of a fast-food restaurant, and their 13-year-old daughter owns the other shares. Both parents work full-time in the restaurant, but the daughter works infrequently. Neither Bonnie nor Clyde receives a salary during the year, when the ordinary income of the S corporation is $180,000. An IRS agent estimates that reasonable salaries for Bonnie, Clyde, and the daughter are $30,000, $35,000, and $10,000, respectively. What adjustments would you expect the IRS to impose upon these taxpayers?

Answer 1

Net income = $180,000

- salaries = ($30,000 + $35,000 + $10,000 = $75,000)

adjusted net income = $105,000

the adjusted net income must now be divided equally between the 3 partners:

• Bonnie: $35,000
• Clyde: $35,000
• daughter: $35,000

Their yearly gross income:

• Bonnie: $35,000 + $30,000 = $65,000
• Clyde: $35,000 + $35,000 = $70,000
• daughter: $35,000 + $10,000 = $45,000

total taxable income = $65,000 + $70,000 + $45,000 = $180,000