LO.1 Kirby and his wife Melinda own all of the stock of Thrush. Melinda is the president, and Kirby is the vice president. Melinda and Kirby are paid salaries of $500,000 and $350,000, respectively, each year. They consider the salaries to be reasonable based on a comparison of salaries paid for comparable positions in comparable companies. They project Thrush’s taxable income for next year, before their salaries, to be $975,000. They decide to place their three teenage children on the payroll and to pay them total salaries of $125,000. The children will each work about five hours per week for Thrush.
a. What are Kirby and Melinda trying to achieve by hiring the children? b. Calculate the tax consequences on Thrush and on Kirby and Melinda’s family of hiring the children.