Homer Currently Operates a Successful S Corporation

question 44

Multiple Choice

Homer currently operates a successful S corporation. He would like to bring his two teenage children into the business. If he gives each child 10% of the stock, which of the following statements is true?

• A) Since the children did not pay for the stock, Homer will still be taxed on the full income of the corporation under the assignment of income doctrine.
• B) Homer must receive a reasonable salary for any time he spends working on behalf of the business.
• C) Both statements are true.
• D) Neither statement is true.

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Definitions:

Total Cost

Total cost refers to the aggregate sum of all costs, both fixed and variable, incurred by a business in producing goods or services.

Fixed Cost

Fixed cost is an expense that does not change with the level of production or sales, such as salaries, rent, and insurance.

Variable Cost

Costs that change directly with the level of production or service output.

Total Cost

The aggregate expenditure incurred by a business to produce, buy, or sell goods and services, including fixed and variable costs.