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Reasonable salary income of a sole shareholder of Camel

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Camel is the sole shareholder of Desert, Inc. Desert's taxable income before the payment of Camel's salary is \$175,000. Based on this, Camel has the corporation pay him a salary of \$100,000 and a bonus of \$75,000. A reasonable salary and bonus would be \$125,000. Which of the following is correct?

a. The taxable income of Desert, Inc., is \$0 (\$175,000 - \$175,000 salary and bonuses).
b. The taxable income of Desert, Inc., is \$75,000 (\$175,000 - \$100,000).
c. Camel has salary and bonus income of \$125,000.
d. Camel has salary and bonus income of \$125,000 and dividend income of \$50,000.
e. None of the above.

Solution Preview

This problem has three possible solutions, as follows:

Salary and bonus are both treated as payroll expense and in that regard, they are identical. As stated in the problem, Camel was paid all of the profits in officer's salary and therefore a. is correct. The taxable income is -0- because the ...

Solution Summary

The solution explains that there are three possible answers to the problem depending on circumstances detailed in the solution. After the three are explained in a paragraph each, there is a statement about the preferred solution.

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