Test bank taxation of individuals and business entities 2015 6e by brian c spilker chap012

Chapter 12 Compensation True / False Questions Current compensation is usually comprised of salary, wages, and bonuses True False Employees complete a Form W-2 to specify their income tax withholding True False Employers computing taxable income receive a deduction for salary and wages paid to employees True False Employers computing taxable income under the accrual method may deduct wages accrued as compensation expense in one year and paid in the subsequent year, as long as the company makes the payment within 2½ months after the employer's year-end True False One purpose of Form W-4 is to determine an employee's withholding True False On Form W-4, an employee can only claim one allowance for each personal or dependency exemption that will be claimed on the employee's income tax return True False An employee can indicate whether they want an additional amount withheld for payroll taxes on the Form W-4 True False Employers receive a deduction for compensation paid to and employment taxes paid on behalf of employees True False An employer always receives a deduction for total compensation paid to a CEO True False 12-1 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 10 One primary purpose of equity compensation is to motivate employees True False 11 The date on which stock options are given to the employee is called the exercise date True False 12 Stock options will always provide employees with future compensation True False 13 The date on which stock options are no longer subject to forfeiture is called the vesting date True False 14 When stock options are exercised they are converted into actual employer stock True False 15 Employees will always prefer to receive incentive stock options over nonqualified stock options True False 16 Employers always prefer to award incentive stock options rather than nonqualified stock options True False 17 Employer's expense for stock options is typically recognized earlier for book than tax purposes True False 18 The use of restricted stock is rising relative to the use of stock options True False 19 The employee's income for restricted stock is typically measured on the grant date True False 20 An employee's income with respect to restricted stock is the fair market value on the vesting date True False 21 A section 83(b) election freezes the value of restricted stock for compensation purposes on the vesting date True False 12-2 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 22 Fringe benefits are generally a form of non-cash compensation True False 23 Taxable fringe benefits include automobile allowances, gym memberships, and personal use tickets to the theater or sporting events True False 24 Group-term life insurance is a fringe benefit that can be partially taxable and partially tax free True False 25 Employers sometimes pay a gross-up to employees to cover taxes associated with taxable fringe benefits they provide True False 26 Employers cannot discriminate between highly and non-highly compensated employees when providing taxable fringe benefits True False 27 Health insurance is an example of a nontaxable fringe benefit True False 28 An apartment manager can exclude the fair market value of free rent from his or her income True False 29 Up to $5,250 of educational benefits can be excluded from an employee's compensation True False 30 Up to $10,000 of dependent care expenses can be excluded from an employee's compensation True False 31 Hotel employees can receive free nights lodging on a space available basis without incurring compensation True False 32 Qualified employee discounts allow employees to purchase employer goods at a discount True False 12-3 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 33 Cornhusker Bank reimburses employees for dues to the local bankers association The reimbursement is includible in the employee's income True False 34 Employees may exclude from income items such as occasional theater tickets, tshirts, or a Thanksgiving turkey True False 35 For 2014, up to $300 of qualified transportation fringe benefits can be excluded from income True False 36 A cafeteria plan provides employees discounted meals at a company sponsored dining room True False 37 Flexible spending accounts allow employees to set aside before-tax dollars for medical and dependent care expenses True False Multiple Choice Questions 38 Which of the following forms is filled out by an employee, who is a citizen, at the beginning of an employment relationship? A Form I9 B Form W2 C Form W4 D Form 1099 12-4 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 39 Which of the following items is not included on an employee's Form W-2? A Taxable wages, tips, and compensation B Social Security withholding C Value of stock options granted during the year D Federal and state income tax withholding 40 Which of the following statements regarding compensation is false? A Wages are usually paid by the hour B Salary is usually a form of fixed compensation C Bonuses are a form of compensation obtained if certain criteria are met D Bonuses paid within 2½ months of year end are included in employee's compensation in the year they were earned 41 Which of the following statements regarding income tax withholding is incorrect? A The withholding tables are designed so that employee withholding approximates the tax liability B Large itemized deductions require the need for additional withholding C The withholding tables vary based on filing status D Extra allowances can be claimed and reduce withholding 42 Which of the following isn't done by Form W-2? A Summarizes the employee's taxable salary and wages B Provides annual Federal and state withholding information C Indicates whether an employee had more than one employer during the year D Generated by an employer annually 12-5 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 43 Which of the items is not correct regarding withholding? A Employees that also have self employment income can have additional amounts withheld to avoid estimated tax payments B Employees cannot claim an allowance for a child unless they are entitled to claim the child as a dependent C Employees can claim exempt and avoid withholding D Married employees can choose to be withheld at the higher single rates 44 Which of the following regarding the Form W-4 is incorrect? A Determines an employee's income tax withholding B Employees can claim more allowances than personal exemptions that will be claimed C Employees can specify additional amounts to be withheld each month D The form can only be adjusted at the beginning of year or start of employment 45 Which of the following statements is true regarding the $1,000,000 limit on covered employees? A The limitation applies to all employees B The limitation applies to all officers C The limitation applies only to the CEO and three other highest compensated officers D The limitation applies only to the CEO and three other highest compensated officers, not including the CFO 46 When a CEO's salary exceeds $1,000,000, the employee _ taxed on the entire amount, and the employer allowed a deduction on the entire amount A is; is B is; is not C is not; is D is not; is not 12-6 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 47 Which of the following is not a purpose of equity-based compensation? A Provide risk and incentives to employees B Motivate employees by aligning employee and employer incentives C Avoid compensation limits for executives D Provides a low or no cost form of compensation 48 Which of the following is true regarding stock options? A A loss is realized when stock options lapse B There is typically no tax effect on the grant date C Income recognized on the exercise date is greater for incentive stock options than nonqualified options D The bargain element on a nonqualified option is taxed to employees at capital gain rates 49 Which of the following refers to the date stock options are awarded to an employee? A Grant date B Exercise date C Lapse date D Vesting date 50 Aharon exercises 10 stock options awarded several years ago The following information pertains to the options: (1) each option gives the employee the right to buy 10 shares, (2) the market price on the grant date was $7, (3) the strike price is $10, and (4) the market price on the exercise date was $15 How much will it cost Aharon to purchase the options on the exercise date? A $90 B $50 C $70 D $1,00 12-7 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 51 Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working when the stock price was $6 per share When the share price was $15 per share, she exercised all of her options Eighteen months later she sold all of the shares for $20 per share What is the amount of Maren's bargain element? A $0 B $70 C $90 D $1,50 E None of these 52 Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working when the stock price was $6 per share When the share price was $15 per share, she exercised all of her options Eighteen months later she sold all of the shares for $20 per share How much gain will Maren recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent? A $0 gain and $0 tax B $500 gain and $75 tax C $500 gain and $175 tax D $1,200 gain and $180 tax 53 How is the bargain element for a stock option calculated? A The difference between the strike price and the market price on the date of grant B The difference between the market price on the exercise date and the market price on the date of grant C The difference between the market price on the exercise date and the strike price D The difference between the market price on the sale date and the strike price 12-8 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 54 Which of the following pairs of items is not needed to calculate the after-tax proceeds for a same-day sale? A Strike price and date B Strike price and date C Market price on exercise date D Market price on tax rate market price on exercise market price on grant sale date and market price on sale date and marginal 55 Bad Brad received 20 NQOs (each option gives him the right to purchase 30 shares of stock for $10 per share) from his employer At the time he started working, the stock price was $11 per share Now that the share price is $25 per share, he intends to exercise all of the options Two years later Bad Brad sells the stock for $27 per share What is Bad Brad's basis in his stock for purposes of calculating the gain or loss? A $6,00 B $9,00 C $15,00 D $16,20 56 Which of the following statements regarding restricted stock is false? A Like stock options, restricted stock has to vest before it can be sold B Like nonqualified stock options, the employee's income inclusion for restricted stock is the bargain element C Even if the value of restricted stock decreases from the price on the grant date, it retains some value to the employee D There is no effective tax planning elections for restricted stock 12-9 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 57 Tom recently received 2,000 shares of restricted stock from his employer, Independence Corporation, when the share price was $10 per share Tom's restricted shares vested three years later when the market price was $14 Tom held the shares for a little more than a year and sold them when the market price was $20 What is the amount of Tom's income or loss on the vesting date? A $0 B $10,00 C $20,00 D $28,00 58 Tom recently received 2,000 shares of restricted stock from his employer, Independence Corporation, when the share price was $10 per share Tom's restricted shares vested three years later when the market price was $14 Tom held the shares for a little more than a year and sold them when the market price was $12 What is the amount of Tom's income or loss on the sale? A $ B $2,000 loss C $4,000 gain D $4,000 loss 59 Which of the following is false regarding a section 83(b) election? A The election freezes the value of the employee's compensation at the grant date B The election is an important tax planning tool if the stock is expected to increase in value C The election must be made within 30 days of the grant date D If an employee leaves before the vesting date, any loss is limited to $3,000 12-10 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 72 Kevin is the financial manager of Levingston BMW The shop allows employees to purchase up to two vehicles at a discount Levingston's average gross profit percentage is 15% This year Kevin purchased a 530 model and a new M3 What amount must Kevin include in income? A $ B $2,20 C $3,00 D $25,00 Because the autos are sold for a discount larger than the average gross profit percentage, the amount of income recognized is $2,200 The income on the 530 is $450 ($54,000 - $53,550) and the income on the M3 is $1,750 ($57,000 $55,250) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Medium Topic: Fringe benefits 73 Which of the following is false regarding dependent care expenses? A Up to $5,000 of reimbursed expenses can qualify B Employers may discriminate among employees C Dependent children under 13 qualify D Spouses who are physically or mentally unable to care for themselves qualify Employers may not discriminate with respect to dependent care expenses AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits 12-53 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Level of Difficulty: Easy Topic: Fringe benefits 74 Tasha receives reimbursement from her employer for dependent care expenses for up to $8,000 Tasha applies for and receives reimbursement of $6,000 for her 10 year old son How much, if any, is includible in her income? A $0 B $1,00 C $3,00 D $6,00 Employees may exclude up to $5,000 of dependent care expenses AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 75 Which of the following statements concerning cafeteria plans is true? A Allows employees to choose from a menu of fringe benefits or to choose cash B Most of the menu choices are nontaxable fringe benefits C Any cash elected is treated at taxable compensation D All of these are true statements See discussion in text AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 12-54 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 76 Tanya's employer offers a cafeteria plan that allows employees to choose among a number of benefits Each employee is allowed $6,000 in benefits For 2014, Tanya selected $3,200 of parking, $2,200 in 401(k) contributions, and $800 of cash How much must Tanya include in taxable income? A $0 B $1,00 C $1,12 D $4,00 $1,000 is includable: $200 of parking benefits [$3,200 - ($250 excludable amount × 12)] and $800 of cash AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 77 Which of the following is a fringe benefit that employers can discriminate among employees? A No additional cost service B Qualified employee discount C Qualified transportation fringe D Employee educational assistance See Exhibit 12-13 AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Medium Topic: Fringe benefits 12-55 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 78 Lara, a single taxpayer with a 30 percent marginal tax rate, desires health insurance The health insurance would cost Lara $5,000 to purchase if she pays for it herself (Lara's AGI is too high to receive any tax deduction for the insurance as a medical expense) Lara's employer has a 40 percent marginal tax rate Ignoring payroll taxes, what is the maximum amount of before-tax salary Lara would give up to receive health insurance? A $1,50 B $5,00 C $7,14 D $8,33 $5,000/(1 - 3) AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits Essay Questions 79 Leesburg paid its employee $200,000 of compensation for the year What is the after-tax cost of paying the salary assuming a 30 percent marginal tax rate (ignore payroll taxes)? $140,000 Feedback: $200,000 - $60,000 ($200,000 × 30%) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-01 Discuss and explain the tax implications of compensation in the form of salary and wages from the employee's and employer's perspectives Level of Difficulty: Easy Topic: Salary and wages 12-56 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 80 Big Bucks paid its CEO $1,500,000 of compensation for the year What is the aftertax cost of paying the salary assuming a 30 percent marginal tax rate? $1,200,000 Feedback: See calculation below: AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-01 Discuss and explain the tax implications of compensation in the form of salary and wages from the employee's and employer's perspectives Level of Difficulty: Hard Topic: Salary and wages 81 Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share Now that the share price is $20 per share, she intends to exercise all of her options How much cash will Hazel need on the exercise date? $1,400 Feedback: 20 options × 10 shares × $7 exercise price AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Easy Topic: Equity-based compensation 12-57 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 82 Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share Now that the share price is $20 per share, she intends to exercise all of her options How much income will Hazel recognize on the exercise date and how much tax will she pay assuming her marginal tax rate is 25 percent? $2,600 and $650 Feedback: The bargain element ($2,600) is income [20 options × 10 shares × ($20 market price - $7 exercise price)] The tax is calculated as follows: $2,600 × 25% AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Medium Topic: Equity-based compensation 83 Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share Now that the share price is $20 per share, she intends to exercise all of her options If Hazel holds the shares for two years and sells them when the market price is $25, how much gain will Hazel recognize on the sale and how much tax will she pay assuming her marginal tax rate is 25 percent? $1,000 and $150 Feedback: The gain realized is $5,000 (200 shares × $25) less basis $4,000 (200 shares × $20 exercise price) The tax is calculated as follows: $1,000 × 15% (preferential rate) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Easy Topic: Equity-based compensation 12-58 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 84 Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working when the stock price was $14 per share Three years later, when the share price was $23 per share, she exercised all of her options How much cash will Suzanne need on the exercise date? $4,800 Feedback: 20 options × 20 shares × $12 exercise price AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Easy Topic: Equity-based compensation 85 Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working when the stock price was $13 per share Three years later, when the share price was $23 per share, she exercised all of her options If Suzanne holds the shares for two additional years and sells them when the market price is $30, how much gain will Suzanne recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent? $7,200 and $1,080 Feedback: The gain realized is $7,200; $12,000 realized (400 shares × $30) less basis $4,800 (400 shares × $12 exercise price) The tax is calculated as follows: $7,200 × 15% (preferential rate) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Medium Topic: Equity-based compensation 12-59 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 86 Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working when the stock price was $13 per share Three years later, when the share price was $23 per share, she exercised all of her options If Suzanne holds the shares for one additional year and sells them when the market price is $30, how much gain will Suzanne recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent? $7,200 and $2,520 Feedback: The gain realized is $7,200; $12,000 realized (400 shares × $30) less basis $4,800 (400 shares × $12 exercise price) The tax is calculated as follows: $7,200 × 35% (because she didn't meet the two year holding period) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Medium Topic: Equity-based compensation 87 Raja received 20 NQOs (each option gives him the right to purchase 15 shares of stock for $10 per share) from his employer at the time he started working when the stock price was $11 per share Now that the share price is $20 per share, he intends to exercise all of the options using a same-day sale What are Raja's aftertax proceeds from the sale if his marginal tax rate is 30 percent? $2,100 Feedback: The after-tax proceeds is the sales proceeds $6,000 (300 shares × $20) less cash needed to exercise and taxes is $3,000 (300 shares × $10 strike price) less taxes of $900 ($3,000 × 30 percent) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Hard Topic: Equity-based compensation 12-60 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 88 Kaijsa received 20 NQOs (each option gives her the right to purchase 30 shares of stock for $8 per share) from her employer at the time she started working when the stock price was $9 per share Now that the share price is $18 per share, she intends to exercise all of her options If Kaijsa holds the shares for two years and sells them when the market price is $25, what is the amount of the deduction and tax savings her employer will receive (assume the employer's marginal tax rate is 30 percent? $6,000 deduction and $1,800 in tax savings Feedback: The deduction is equal to the bargain element ($6,000), which is treated as income [20 options × 30 shares × ($18 market price - $8 exercise price)] The tax is calculated as follows: $6,000 × 30% AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Medium Topic: Equity-based compensation 89 Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share Rick's restricted shares vested three years later when the market price was $12 Rick held the shares for a little more than a year and sold them when the market price was $15 What is the amount of Rick's income on the vesting date? Assuming a marginal tax rate of 30 percent, what is Rick's tax on the restricted stock? $6,000 and $1,800 Feedback: $6,000 (500 shares × $12 market price on vesting date) and $1,800 tax ($6,000 × 30 percent) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Easy Topic: Equity-based compensation 12-61 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 90 Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share Rick's restricted shares vested three years later when the market price was $12 Rick held the shares for a little more than a year and sold them when the market price was $15 What is the amount of Rick's income on the sale of the stock? Assuming a marginal tax rate of 30 percent, what is Rick's tax on the sale of the stock? $1,500 and $225 Feedback: $1,500 [500 shares × ($15 market price on sale date - $12 market price on vesting date)] and $225 tax ($1,500 × 15 percent) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Medium Topic: Equity-based compensation 91 Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share Rick's restricted shares vested three years later when the market price was $12 Rick held the shares for a little more than a year after vesting and sold them when the market price was $15 What is the amount of Rick's compensation income if Rick made an election under section 83(b) when the stock was granted? Assuming a marginal tax rate of 30 percent, what is the amount of Rick's income inclusion and tax liability at the time of the income inclusion? $2,500 and $750 Feedback: 500 shares × $5 (market value at grant date because of section 83(b) election $2,500 × 30 percent is tax AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Medium Topic: Equity-based compensation 12-62 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 92 Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share Rick's restricted shares vested three years later when the market price was $12 Rick held the shares for a little more than a year after vesting and sold them when the market price was $15 Assuming that Rick made an election under section 83(b) when the stock was granted, what is the amount of Rick's income inclusion and tax liability upon the sale of the stock? $5,000 and $750 Feedback: $5,000 [500 shares × ($15 market price on sale date - $5 market price on grant date)] and $750 tax ($5,000 × 15 percent) AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-02 Describe and distinguish the tax implications of various forms of equity-based compensation from the employer's and employee's perspectives Level of Difficulty: Medium Topic: Equity-based compensation 93 Kimberly's employer provides her with a personal travel allowance of $10,000 annually Her marginal tax rate is 30 percent Her employer has a marginal tax rate of 35 percent What is Kimberly's after-tax benefit, ignoring payroll taxes? $7,000 Feedback: The after-tax benefit is the $10,000 benefit less the $3,000 ($10,000 × 30 percent) of tax AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 12-63 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 94 Hope's employer is now offering group-term life insurance The company will provide each employee with $200,000 of group-term life insurance It costs Hope's employer $700 to provide this amount of insurance to Hope each year Assuming that Hope is 27 years old, use the table to determine the monthly premium that Hope must include in income as a result of receiving the group-term life benefit? (ADD TABLE) $9 per month Feedback: $200,000 policy less $50,000 exemption times cents per month per thousand of coverage AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 95 Brandy graduated from Vanderbilt with her bachelor's degree recently She works for Walton & Company CPAs The firm pays her tuition ($8,000 per year) for her so that she can receive her MBA How much of the $8,000 tuition benefit does Brandy need to include in her income? $2,750 Feedback: Up to $5,250 of tuition benefits can be excluded from income AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 12-64 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 96 Frederique works for a furniture retailer The shop allows all employees to purchase 10 pieces of furniture per year at a discount This year Frederique purchased eight pieces She gave three pieces as a gift to her brother as a wedding present Her employer's average gross profit percentage is 25 percent Each piece was 20 percent off of normal retail prices and in all cases the employee price exceeded the employer's cost What amount of the discount must be included in Frederique's income? $0 Feedback: Because the discount was less than the employer's average gross profit percentage, there is no income inclusion AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 97 Jane is an employee of Rohrs Golf Emporium The shop allows employees to purchase equipment at significant discount This year Jane purchased several new items to improve her game If the employer's average gross profit percentage is 30 percent, what amount must Jane include in income? $40 Feedback: $40 for the irons [($1,200 × 70 percent) - $800], because the discount exceeds the employer's average gross profit percentage of 30 percent AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Medium Topic: Fringe benefits 12-65 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 98 Annika's employer provides only its executives with parking benefits The fair market value of the annual parking benefit is $4,800 What is the amount Annika must include into income with respect to her parking benefit in 2014? $1,800 Feedback: $4,800 benefit less the $3,000 ($250 × 12) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 99 Annika's employer provides each employee with up to $200 of monthly vouchers for public transportation What is the amount that Annika must include into income with respect to her benefit in 2014? $840 Feedback: $2,400 benefit less the $1,560 ($130 × 12) Employees can exclude up to $130 per month of transportation benefits AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 100 Corinne's employer offers a cafeteria plan that allows employees to choose among a number of benefits Each employee is allowed $12,000 in benefits For 2014, Corinne selected $4,500 of health insurance, $5,500 of dependent care, $1,000 in 401(k) contributions, and $1,000 of cash How much must Corinne include in taxable income? $1,500 Feedback: Employees can exclude up to $5,000 of dependent care benefits, so the additional $500 is taxable and cash is always taxable AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits 12-66 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Level of Difficulty: Medium Topic: Fringe benefits 101 Lina, a single taxpayer with a 35 percent marginal tax rate, desires health insurance The health insurance would cost Lina $8,000 to purchase if she pays for it herself (Lina's AGI is too high to receive any tax deduction for the insurance as a medical expense) Lina's employer has a 30 percent marginal tax rate What is the maximum amount of before-tax salary Lina would give up to receive health insurance? $12,308 Feedback: $8,000/(1 - 35) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Medium Topic: Fringe benefits 102 Lina, a single taxpayer with a 35 percent marginal tax rate, desires health insurance The health insurance would cost Lina $8,000 to purchase if she pays for it herself (Lina's AGI is too high to receive any tax deduction for the insurance as a medical expense) Because of group discounts, her employer can purchase the insurance for $6,000 Lina's employer has a 30 percent marginal tax rate What would be the after-tax cost to Lina's employer to provide her with health insurance? $4,200 Feedback: $6,000 × (1 - 3) AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Learning Objective: 12-03 Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Level of Difficulty: Easy Topic: Fringe benefits 12-67 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education ... amount of Rick's income on the sale of the stock? Assuming a marginal tax rate of 30 percent, what is Rick's tax on the sale of the stock? 91 Rick recently received 500 shares of restricted stock... discount"? A The discount relates to goods or services of the employer B The discount on services doesn't exceed 20 percent of the price offered to customers C The discount can be elected up to five... deducted AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 12-01 Discuss and explain the tax implications of compensation