Robin and Jeff own an unincorporated hardware store. They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardware store to $0. Based on this policy, Robin and Jeff each receive a total salary of $125,000. This is paid as follows: $8,000 per month and $29,000 on December 31. Determine the amount of the salary deduction.
What will be an ideal response?
Since the hardware store is not incorporated, the issue of the reasonableness of the salaries is not relevant. Robin and Jeff will report income of $125,000 each regardless of whether it is labeled as salary or as a distribution of the hardware store's net income. Therefore, there is nothing wrong with the hardware store (i.e., a partnership) taking a $250,000 salary deduction.
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