Strong Corporation Is Owned by a Group of 20 Shareholders

question 26

Essay

Strong Corporation is owned by a group of 20 shareholders. During the current year, Strong Corporation pays $225,000 in salary and bonuses to Stedman, its president and controlling shareholder. The IRS audits Strong's tax return and determines that reasonable compensation for Stedman would be $125,000. Strong Corporation agrees to the adjustment.
a)What effect does the disallowance of part of the deduction for Stedman's salary and bonuses have on Strong Corporation and Stedman?
b)What tax savings could have been obtained by Strong Corporation and Stedman if an agreement had been in effect that required Stedman to repay Strong Corporation any amounts determined by the IRS to be unreasonable?

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Definitions:

Nonrenewable Natural Resource

A natural resource, such as fossil fuels or minerals, that cannot be replaced or replenished once it is used, leading to potential depletion.

Timber

Wood that has been processed into beams and planks, a stage in the production process that precedes finished wood products.

Tin

A chemical element with the symbol Sn and atomic number 50, known for its malleability, ductility, and resistance to corrosion, used in various alloys and as a protective coating for other metals.

Shale

A fine-grained sedimentary rock that can be a source of petroleum and natural gas.