Zorn conducted his professional practice through Zorn, Inc. The corporation uses
ID: 2583803 • Letter: Z
Question
Zorn conducted his professional practice through Zorn, Inc. The corporation uses a fiscal year ending September 30 even though the business purpose test for a fiscal year cannot be satisfied. For the year ending September 30, 2017, the corporation paid Zorn a salary of $180,000, and during the period January through September 2017, the corporation paid him a salary of $150,000.
a. How much salary should Zorn receive during the period October 1 through December 31, 2017?
b. Assume that Zorn received only $24,000 salary during the period October 1 through December 31, 2017. What would be the consequences to Zorn, Inc.?
Explanation / Answer
a. According to the information in the question it seems that Zorn Inc is a sole proprietorship. Hence, being a sole proprietor he is required to follow a calender year instead of a fiscal year unless there is approval from Internal Revenue Service(IRS). He would be paid a salary of $110000 if his salary from October to December was equivalent.
($180000+$150000 = $330000.
$330000/9*3 = $110000)
b. As Zorn Inc did not receive minimum $110000 for 3 months, it will have to suffer negative tax effects. As per the law, salary payments exceeding the limits are not allowed as an expense but can be carried forward to subsequent year.