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IRS recalculation of tax for unreasonable compensation

1. Michael is the President and sole shareholder of Silver, Inc. a regular corporation. The corporation reported taxable income of $1,200,000, after deducting Michael's $1,000,000 salary. If the IRS disallows $600,000 of the salary as unreasonable compensation, the corporation's regular income tax will change by an:

A. $204,000 increase
B. $175,000 increase
C. $175,000 decrease
D. $204,000 decrease

Please show your work in detail.

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Solution Preview

If the IRS audits Silver, Inc and decides that $400,000 is a reasonable amount of compensation, the remaining difference of $600,000 would be reclassified as a dividend. ...

Solution Summary

Silver, Inc's audit by IRS proposes an increase in tax. The solution explains and shows the calculations to arrive at the correct answer. Also there is a comment about penalties that often arise in this situation.