For a number of years, Nina was a mechanical engineer for a chemical company. She always enjoyed working around her home in her spare time, doing necessary repairs and maintenance. However, she was always frustrated by the multitude of tools she had to carry around to do her tasks. One evening, she designed a gizmo that could do the work of 12 common home repair tools. At first, she made a few gizmos by hand and gave them to friends as gag gifts. Their reaction to the gizmo was so enthusiastic that Nina took out a patent on it, got a loan from a friend at Local Bank, quit her job, and began a small-scale manufacturing operation.
In setting up her business, Nina took most of her advice from her brother-in-law, an assistant district attorney. Accordingly, she organized the business as a corporation and pays salaries to herself, her husband, Stan, and their 3 children (ages 2, 9, and 13). In addition, she put her investment portfolio inside the corporation.
After the first year of business, the corporate books show a loss of $25,000 after paying salaries of $30,000 to Nina, $20,000 to Stan (who continues to earn $18,000 from his full-time job), and $5,000 to each child.
a. What tax-related mistakes has Nina made regarding the business? Be specific. State any negative effects that could arise from this arrangement.
b. Is there anything Nina can do to rectify the problems you identified? Explain, and state how each solution you propose cures or mitigates the problem.