Question

Mrs. Jansen is the sole shareholder of Mimeo Corporation. She also owns the office building that serves as corporate headquarters. Last year, Mimeo paid $200,000 annual rent to Mrs. Jansen for use of the building. Minmeo's marginal tax rate was 21 % and Mrs . Jansen's marginal tax rate on ordinary income was 37%. The revenue agent who audited Mimeo's return concluded that the fair rental value of the office building was $150,000. Compute the net impact of this audit conclusion on Mimeo's income tax liability Multiple Choice $8,500 increase $10.500 decrease $8,500 decrease $10,500 increase

Answer 1

Mimeo's Income tax liability will increase as the expenditure of payment of rent to Mrs.Jansen will be limited to $150,000.

Now the corporation will claim less deduction of an expense.

=50,000 * 0.21 = $ 10,500 will increase