Madeline Operates a Janitorial Service

question 46

Essay

Madeline operates a janitorial service. The business is organized as a corporation. She has a crew of 100 employees that clean offices and commercial buildings on a set schedule. Madeline also runs a maid service. Since persons paying for the maid services are individuals, the amounts paid to Madeline are not reported to the IRS. Madeline has developed a tax plan. She will deposit the maid service fees to her personal bank account. As a result, she can draw a smaller salary from the janitorial service. She will pay the maids for their services through the corporation. Since she is not deducting her salary from the corporation to the extent she keeps the maid fees, she does not report income from the maid fees. Has Madeline evaded the income tax? Explain.

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Definitions:

Financial Distress

A situation where a company cannot meet or has difficulty paying off its financial obligations to its creditors.

Cash Dividend

A distribution of profits by a corporation to its shareholders in the form of cash.

NPV Projects

Net Present Value Projects; a method used to evaluate the profitability of an investment or project by calculating the present value of all cash flows associated with it.

Residual Policy

A dividend policy where dividends are paid out from residual or leftover earnings after all productive investment opportunities are funded.