Bonnie and Clyde each own one-third of a fast-food restaurant, and their 13 year
ID: 2349510 • Letter: B
Question
Bonnie and Clyde each own one-third of a fast-food restaurant, and their 13 year-old daughters owns the other shares. Both parents work full-time in the restaurant, but the daughter works infrequently. Meither Bonnie , Clyde receives a salary during the year,when the ordinary income of the S corporation is $180,000. An IRS agent estimates that reasonable salaries for Bonnie, Clyde, and the daughter are $30,000, $35,000, and $10,000, respectively. What adjustments would you expect the IRS to impose upon these taxpayers?Explanation / Answer
Taxable income of all taxpayers is reduced by tax deductions for expenses related to their business. These include salaries, rent, and other business expenses paid or accrued, as well as allowances for depreciation. The deduction of expenses may result in a loss. Generally, such loss can reduce other taxable income, subject to some limits. Individuals are allowed several nonbusiness deductions. A flat amount per person is allowed as a deduction for personal exemptions. For 2009 this amount was $3,650. Each taxpayer is allowed one such deduction for themselves and one for each person they support. In addition, individuals get a deduction from taxable income for certain personal expenses. Alternatively, the individual may claim a standard deduction. For 2011, the standard deduction is $5,800 for single individuals, $11,600 for a married couple, and $8,500 for a head of household.