Bonus equal to difference between corporation taxable income

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Reference no: EM131255197

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Nittany Company pays its sole shareholder, Tammy Lion, a salary of $115,200. At the end of each year, the company pays Tammy a "bonus" equal to the difference between the corporation’s taxable income for the year (before the bonus) and $65,500. In this way, the company hopes to keep its taxable income at amounts that are taxed at either 15 percent or 25 percent. This year, Nittany reported pre-bonus taxable income of $707,500 and paid Tammy a bonus of $642,000. On audit, the IRS determined that individuals working in Tammy’s position earned on average $321,000 per year. The company had no formal compensation policy and never paid a dividend. ReferCorporate tax table.

a. How much of Tammy’s bonus might the IRS recharacterize as a dividend?

c. Assuming the IRS recharacterizes $218,100 of Tammy’s bonus as a dividend, what additional income tax liability does Nittany Company face?

Reference no: EM131255197

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