Kirby, the Sole Shareholder of Falcon, Inc

question 54

Essay

Kirby, the sole shareholder of Falcon, Inc., leases a building to the corporation. The taxable income of the corporation for 2014, before deducting the lease payments, is projected to be $500,000.
a. What are the tax consequences to Kirby and to Falcon if Kirby leases a building to the corporation for $400,000?
b. Is there a potential pitfall? How would it change the tax consequences to Kirby and to Falcon?

---

Definitions:

Contribution Margin Ratio

A financial metric that shows what percentage of sales revenue is available to cover fixed costs and generate profit.

Variable Costs

Costs that change in proportion to the level of activity or volume of production, such as raw materials and labor expenses.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance, offering predictability in budgeting.

Operating Leverage

A measure of the relative mix of a business’s variable costs and fixed costs, computed as contribution margin divided by operating income.