tax

Which of the following features of a qualified retirement plan are true? (Select all that apply.)

Amounts that an employee contributes are not taxed currently to the employee. Employer contributions to the plan are deductible by the employer in the year of contribution. Investment earnings generated by the plan are not taxed in the year they are generated.

Which of the following statements about employee stock options is false?

An employee stock option is a form of compensation that requires a significant cash outlay.

Which of the following statements concerning the employee-employer relationship is true?

An employer generally sets the employee's work schedule.

Which of the following statements relating defined-contribution and defined-benefit plans is false?

An employer sponsored plan can only be structured as a defined-benefit plan. Individual plans are typically defined-contribution plans.

Special rules limit the deductibility of compensation to the CEO and the three highest paid executives of a publicly traded company. These rules limit the compensation deduction to $.

Blank 1: 1000000 or 1,000,000

Jeb retired from GP, Inc. on December 31, 2013. Company records indicate the following salary record. 2010: $110,000 2011: $120,000 2012: $130,000 2013: $140,000 Jeb is eligible for GP's defined-benefit program. As a qualified retirement plan, the maximum pension benefit that GP may provide Jeb in 2019 is $.

Blank 1: 130,000 or 130000

Mr. Downey, an employee of Cafe Casino, has $125,000 of life insurance coverage under an employer provided group term plan. According to the table provided by Treasury, the cost of life insurance for a person Mr.Downey's age is $0.20/month per $1,000 of coverage. This fringe benefit results in $ of taxable income to Mr. Downey.

Blank 1: 180

Alison's employer has offered her the choice of $5,000 additional salary or a fringe benefit that would cost her $3,400 to purchase herself. Assume a 28% marginal tax rate and that all of Alison's compensation is subject to FICA (7.65%). Accepting the fringe benefit is worth $ more than the additional salary.

Blank 1: 183, 182.5, or 182

Charter Company provides an employer sponsored medical insurance plan for its employees. Elise is an employee of Charter earning $75,000. Charter also pays $1,100 in medical insurance premiums on Elise's behalf. With respect to these two compensation elements, Elise reports $ of taxable income and Charter is permitted a $ deduction.

Blank 1: 75000 or 75,000 Blank 2: 76100

Lucas is a U.S. citizen working in his employer's London office for the past five years. If his $200,000 salary is his only source of income, his AGI is $.

Blank 1: 92,400 or 92400

On March 1, Mario, age 50, withdrew $100,000 from his retirement account. On March 30, he deposited $75,000 into a new qualified retirement account. Assuming a 28% marginal tax rate, the total tax cost associated with the distribution is $.

Blank 1: 9500 or 9,500

An employer provided qualified retirement plan in which the plan defines the amount of the annual employer contribution, rather than the benefit to be received upon retirement, is termed a defined- plan.

Blank 1: contribution

All else equal, the employer has a financial incentive to classify a worker as a(n) rather than a(n) .

Blank 1: independent contractor or contractor Blank 2: employee

An employee grants an employee the opportunity to purchase stock in their company at a bargain price for a defined period of time.

Blank 1: stock Blank 2: option

Mike and Misty Morrow own My Printing, a business that they operate as a sole proprietorship. Their 16 year-old son, Junior, works for the business 10 hours per week after school. Which of the following statements are true regarding Junior's employment in the family business? (Select all that apply.)

Employing Junior has the overall effect of shifting income to a lower taxed entity. My Printing may deduct compensation paid to Junior as long as it is "reasonable."

Only fringe-benefits that are non-taxable to the employee may be offered in an employer-provided careteria plan.

False Reason: Cafeteria plans may offer employees a selection of both taxable and non-taxable benefits, including additional salary.

True or false: The foreign earned income exclusion provides tax relief to non-U.S. citizens working for U.S. multinational companies.

False Reason: The foreign earned income exclusion provides tax relief to U.S. citizens residing abroad and working for the foreign operations of U.S. multinational companies.

Which of the following statements about Group Term Life Insurance is false?

For tax purposes, cost of coverage is based on the actual premiums for the current year allocated across policies.

Which of the following statements regarding dependent care assistance programs is false?

For the value to be excluded from employee income, dependent care assistance must be provided on the employer's premises.

Which of the following statements best describe fringe benefits? (Select all that apply.)

Fringe benefits are a form of compensation. Fringe benefits can often be offered by employers at a cost lower than the employee could purchase for themselves.

Which of the following statements concerning compensation for high ranking executives is false?

From an employee perspective, efficient tax planning always involves negotiating more before-tax compensation.

From the following list of employer provided, non-taxable fringe benefits, identify the benefits that are non-taxable to employees only up to a threshold prescribed by Congress. (Select all that apply.)

Group term life insurance coverage Dependent care assistance

Which of the following statements regarding the tax consequences of wages is false?

If wages are not deductible as a business expense, then there will never be a payroll tax obligation. Reason: If wages are attributable to personal services (for example, a nanny), they are not deductible for federal tax purposes, but there is a payroll tax obligation.

In 2019, Baker Inc. granted non qualified employee stock options with an exercise price of $20. Which of the following statements is false?

In 2019, Baker will report a temporary book/tax difference related to the option grant.

Which of the following statements regarding the tax consequences associated with an independent contractor is false?

Independent contractors are subject to the federal income tax withholding provisions.

As a condition of employment, Joann is required to purchase a "western outfit" for her job at the Lazy Z Dude Ranch. Her employer has designed a custom outfit, manufactured and sold by Western Wear Unlimited. While Joann is required to purchase the uniform, her employer will reimburse her for the costs. Joann purchased and was reimbursed for two outfits at a cost of $400. Identify the tax implications.

Joann - no taxable income Lazy D - $400 tax deduction Reason: Joann - no taxable income Lazy D - $400 tax deduction

John has been an Arkansas-based employee of Long Company for 10 years. Long Company required John to relocate to South Dakota as part of their expansion to the areal. John incurred $10,000 of moving costs, for which Long reimbursed John for $8,000 of those costs. Which best describes the tax implications to John and Long Company?

John - $0 deduction/$8,000 gross income Long - $8,000 deduction

Which of the following generally does not describe a restricted stock award?

The employee may sell the stock at any time after the award has been made by the employer.

Which of the following statements regarding the foreign earned income exclusion is false?

The exclusion is available to any U.S. citizen employed by a non-U.S. company regardless of where that company is located.

Which of the following is not a factor that the IRS might consider in determining reasonableness of an employee's compensation?

The financial situation of the employee

Indicate which of the following represents a financial incentive that may motivate a firm to classify a worker as an independent contractor rather than an employee. (Select all that apply.)

The firm will not provide medical, dental, or other fringe benefits to the independent contractor. The firm can avoid the administrative costs associated with income tax withholding requirements.

Which of the following statements is false regarding fringe benefits for self-employed individuals?

The general rule is that fringe benefits for self-employed individuals are purchased with before-tax dollars.

Brad's employer, SouthCorp, offers a defined-contribution plan. In 2019, Brad's salary is $43,000. Which of the following statements is true regarding SouthCorp's 2019 contribution to the plan on behalf of Brad? (Select all that apply.)

The maximum that SouthCorp may contribute to the plan for Brad is $43,000. SouthCorp may deduct their contribution to the plan in 2019. Brad is taxed on SouthCorp's contribution to his defined-contribution plan when he withdraws it from the account.

Which of the following better describe characteristics of an independent contractor as opposed to an employee? (select all that apply.)

The nature of the work relationship tends to be more temporary in nature. The work relationship does not typically involve direct supervision of the task.

Which of the following statements about compensation for closely-held corporations is false?

The possibility that salary negotiations may be influenced by the dual role of the employee-shareholder reflects a competitive market. Reason: The possibility that salary negotiations may be influenced by the dual role of the employee-shareholder reflects a fictitious market.

The statutory requirements for qualified retirement plans support which of the following policy objectives? (Select all that apply.)

The risk associated with investment in qualified retirement plans should be minimized. Employers must administer plans in a manner that is equitable across employees of all income levels.

Which of the following statements is true about non qualified options versus incentive stock options?

The total income recognized by the employee option holder is the same regardless of the type of option, although the timing may be different.

which of the following is true regarding wages paid to an employer's child who is under the age of 18?

The wages are not subject to either FICA or unemployment tax.

Which of the following statements is false regarding employee related expenses paid by the employee and reimbursed by the employer?

They are deductible by the employee.

Which of the following statements about employee stock options is false?

They provide an option to acquire equity over an indefinite period of time. Reason: Options are granted for a specific period of time.

In the case of an S Corporatin with a single shareholder, the incentive to pay the sole shareholder an unreasonably low salary for services performed can generall be attribued to the desire to minimize payroll taxes.

True

True or false: To the extent an employer reimburses an employee for employment related moving expenses, the employer may deduct those costs.

True Reason: Beginning in 2018, employment related moving expenses are not deductible by the employee. Any reimbursement by the employer must be included in the employee's gross income and is deductible by the employer as compensation expense.

Which of the following statements is false regarding defined-benefit plans?

Under statutory tax law, minimum annual plan benefits are based on an employee's length of service with the company.

Which of the following statements regarding fringe benefits is true?

Unless specifically excluded by law, any economic benefit received as a result of services provided is subject to tax.

Which of the following statements is false regarding compensation?

When an executive compensation package is negotiated, the primary tax objective should be to minimize the tax to which the executive is subject.

Which of the following statements regarding business-related wages is false?

With respect to compensation level, the IRS can objectively evaluate if it is "reasonable" and, therefore, deductible. Reason: This is a subjective determination because, for example, job responsibilities vary across companies as do employee qualifications.

Wyatt Corporation needs an additional worker on a multi-year project. Wyatt could hire an employee for a $40,000 annual salary. A second option would be to hire an independent contractor for a $45,000 annual fee. Which of the following is true?

Wyatt withholds income taxes only in the case of the employee relationship.

Blayne has decided that he needs to purchase medical insurance that will cost him $9,000. His employer has offered to reduce his salary to $80,000 and provide the medical coverage. Currently, his salary is $90,000 resulting in an after-tax value of $57,915. Assume Blayne has a 28% marginal tax rate and FICA is 7.65%. Blayne should ______.

accept his employer's offer because it results in a $2,565 increase in the value of his after-tax compensation

The untaxed bargain element of an ISO is ______.

added to taxable income in the computation of AMTI

Cafeteria plans ______.

allow employees to customize their benefits to best meet their needs

eXtreme Sports is negotiating a compensation package with a valued employee. eXtreme has offered this employee $100,000 base salary plus medical and dental coverage costing eXtreme $10,000. Which of the following statements is true regarding this package?

eXtreme may deduct both the $100,000 salary and the $10,000 cost of insurance coverage.

For tax purposes, the determination that compensation is reasonable is ______.

evaluated against the compensation level expected in an arm's-length transaction

A fringe benefit that is exempted from income tax is ______.

exempted from payroll tax

The tax expenditures budget quantifies tax revenues forgone as a result of tax preference items. The largest component of the federal government's tax expenditures budget is the ______.

income exclusion for employer provided Health Insurance

The minimum distribution rule for qualified retirement plans ______.

is intended to place a limit on the tax deferral period for contributions and earnings

A profit sharing plan ______.

is more common in firms with unpredictable cash flows

If a firm can hire an independent contractor for the same base compensation it would pay an employee to do the same job, the after-tax cost of the independent contractor will be ______.

less Reason: The after-tax cost will be less because the employer will not pay Social Security and Medicare taxes for the independent contractor. The firm will also not incur the cost of fringe benefits typically offered employees.

For a retirement plan to have tax favored status, the plan ______.

must include a vested right to 100% of the retirement benefit within six or seven years of service, depending on the type of plan

Taylor, age 31, has the opportunity to invest in a business venture. To fund the investment, she withdrew $20,000 from her qualified retirement plan. As a result of the withdrawal, Taylor ______.

must pay a $2,000 penalty and report $20,000 of taxable income Reason: This is a premature withdrawal. Therefore, Taylor must pay tax on the income and also pay a 10% penalty on the withdrawn funds.

Employee paychecks typically ______. (Select all that apply.)

reflect wages earned less amounts withheld for payroll taxes, income tax, and other benefits include payroll tax withholding which reflects the actual payroll taxes attributable to wages earned that period

Tyler contributed $6,000 to a qualified retirement plan. Contributions to the plan and earnings generated are ______.

tax deferred and taxed when withdrawn

The difference between tax and financial reporting for employee stock option grants results in a(n) ______ book/tax difference that is ______.

temporary, unfavorable

Relative to non qualified options, incentive stock options (ISO's) might be considered unfavorable to employers because ______.

the employer is never permitted a deduction for the bargain element

The foreign earned income exclusion was implemented ______.

to increase the ability for multinational U.S. companies to compete globally and to hire U.S. citizens for their foreign operations

Global Corporation awarded Ms. Johns 100 shares of restricted stock. The terms of the award required that she was not eligible to sell the shares for three years from the award date. Share price information related to the award year is as follows: Stock price at time of award: $50/share Stock price at year end: $60/share Assuming that Ms. Johns does request a specific election from the IRS, what amount is included in Ms. Johns gross income in the year of the award?

$0 Reason: The general rule allows that recognition is deferred until the restriction is lifted in three years.

Grant Corporation is a publicly traded company. The CEO has a compensation contract that guarantees $1.2 million plus a $500,000 bonus if stock price and sales meet predetermined levels. Choose the two answers that reflect the permitted deduction and the after-tax cost of CEO compensation should Grant reach the performance goals. Assume a 35% marginal tax rate.

$1,350,000 after-tax cost $1 million deduction Reason: Grant may only deduct $1 million of compensation, Reason: The after-tax cost is $1.7 million less tax savings of $350,000; (deduction of $1 million × 35%) = $1,350,000.

Ms. Weeks is an employee of Medical Assist Corporation. Medical Assist provides Ms. Weeks $48,000 of term life insurance coverage under an employer provided group term plan. Accroding to the table provided by the Treasury, the cost of life insurance of a person Ms. Week's age is $0.25/month per $1,000 of coverage. This fringe benefit results in $_____ of taxable income to Ms. Weeks.

$12 Reason: The value of up to $50,000 of employer provided term life insurance may be excluded.

Ellie, age 29, has decided to withdraw $35,000 from her retirement to purchase a car. Assuming a 28% marginal tax rate, what is the tax cost of the withdrawal?

$13,300 Reason: Tax on the income: 28% × $35,000 = $9,800. Penalty on premature withdrawal: 10% × $35,000 = $3,500. Total tax cost = $9,800 + $3,500 = $13,300.

Delphi provides medical insurance coverage to all employees at an annual cost of $200,000. The after-tax cost of providing this benefit is ______, and it results in ______ additional total taxable compensation to the employees. Assume Delphi is subject to a 35% marginal tax rate.

$130,000; zero Reason: The expenditure is deductible by Delphi, so the after-tax cost is $200,000 - (35% × 200,000). The benefit is excluded from the employee's taxable income, so it results in zero additional taxable compensation.

Kristi Winn is a single parent with a two-year old daughter. This year, Kristi incurred $10,000 of day care costs. Her employer reimburses day care costs of up to $7,000 per year per employee. What are the tax consequences to Kristi and her employer related to this fringe benefit?

$2,000 taxable income to Kristi; $7,000 deduction for her employer Reason: Kristi may exclude $5,000 of the $7,000 reimbursement from income. The employer may deduct the full amount reimbursed as compensation expense.

Hallie works for Goode Company. Her annual salary is $40,000 and Goode also provides her qualified fringe benefits costing Goode $5,000. Hallie is subject to income tax on $______ of income, payroll tax on $______ of income, and Goode is entitled to deduct $______ related to Hallie's total compensation in addition to amounts Goode pays for payroll tax.

$40,000; $40,000; $45,000 Reason: The salary, but not the fringe benefits, is subject to income and payroll tax. Goode may deduct both the salary and the cost of the fringe benefits.

Jared and his three brothers are the sole owners of Cline Corporation. They are also employees of Cline. The IRS has determined that Jared's salary is excessive. Which of the following statements is true?

The IRS may reclassify the portion that is determined to be unreasonable as a constructive dividend.

In 2010, Diego Company granted Danny Duval a non qualified option to purchase 1,000 shares of Diego stock at an exercise price of $20 per share, which reflected the stock price on the date of grant. In 2015, Danny exercised those options when the stock price was $30. In 2019, Danny sold those shares for $35 per share. The tax consequences to Danny are ______.

2010: no tax consequence; 2015: $10,000 ordinary income; 2019: $5,000 capital gain Reason: 2010: no tax consequence; 2015: $10,000 ordinary income for bargain element ($30 - 20) × 1,000 shares; 2019: $5,000 capital gain for additional appreciation since exercise ($35-30) × 1,000 shares.

In 2010, Frazier Company granted Ella Brock an incentive stock option to purchase 1,000 shares of Frazier stock at an exercise price of $20 per share, which reflected the stock price on the date of grant. In 2015, Ella exercised those options when the stock price was $30. In 2019, Ella sold those shares for $35 per share. The tax consequences to Ella are ______.

2010: no tax consequence; 2015: no tax consequence; 2019: $15,000 capital gain Reason: 2010: no tax consequence; 2015: no tax consequence; 2019: $15,000 capital gain calculated as ($35-20) × 1,000 shares.

Which of the following does not represent a type of qualified retirement plan?

A deferred compensation arrangement

Which of the following statements reflect the IRS process for determining if compensation is reasonable for an employee-shareholder of a closely held corporation? (Select all that apply.)

The IRS process is subjective. The IRS applies factors identified by the courts.

Six years ago, Cam Corporation granted Ryan Moore a non qualified option to purchase 1,000 shares of Cam stock at an exercise price of $50 per share, which reflected the stock price on the date of grant. This year, Ryan exercised those options when the stock price was $65. What are the tax consequences on the exercise date to Cam and to Ryan?

Cam: $15,000 deduction; Ryan: $15,000 ordinary income Reason: Cam: $15,000 deduction; Ryan: $15,000 ordinary income computed as ($65-50) × 1000 shares.

Which is not a reason that employers choose to provide fringe benefits?

Congress mandates that companies provide a minimum level of fringe benefits to all employees.

Which of the following best describes compensation contracting?

Efficient tax planning should involve designing a compensation package that results in the greatest overall tax savings.

Eli is self-employed and operates as a sole proprietor. Eli has a medical insurance policy to cover himself and his family. Which of the following statements is true regarding the premiums Eli pays for this policy?

Eli may deduct the premiums as an above-the-line deduction.

Which of the following is not a reason the IRS prefers classification of a worker as an employee rather than as an independent contractor?

Employees are assessed higher total payroll taxes.

Which of the following statements is false regarding the tax consequences of wages?

Employees may elect whether or not to have their employers withhold federal income taxes from their wages.

Which of the following statements concerning qualified retirement plans is false?

Employer contributions are not deductible by the employer in the year of contribution. Reason: Employer contributions are deductible in the year of contribution.

Match the type of qualified retirement plan with the phrase that best describes it.

Employer sponsored plan- A defined contribution plan, such as a 401(k) Plans available only to a self-employed Individual- Keogh Plan Plans initiated by individuals- IRAs (Individual Retirement Accounts)

Which of the following statements regarding the tax consequences associated with an employee is true?

Employers are required to withhold both payroll tax (Social Security and Medicare) and income tax from employee wages.

Which of the following is not a requirement of a qualified plan that is intended to reduce the risk associated with participating in the plan?

Employers must guarantee a rate of return on employee contributions invested in the plan.

Blade provides an employer sponsored medical insurance plan for its employees. Assume Blade paid $800 in premiums to the insurance company for each employee. John is employed by Blade and earns $40,000. Which of the following statements is true with respect to John and these elements of compensation?

John will report $40,000 of taxable income. Blade will deduct $40,800. Reason: John will report $40,000 of taxable income. Blade will deduct $40,800. While the premium paid on John's behalf is excluded from John's income, Blade is permitted the deduction.

Domestic Corporation awarded Mr. Jenkins 100 shares of restricted stock. The terms of the award required that he was not eligible to sell the shares until vested three years from the award date. Mr. Jenkins sold the shares three months after the shares vested. Share price information related to the award is as follows: Stock price at time of award: $50/share Stock price at award year end: $60/share Stock price when vested in three years: $65/share Stock price when sold: $67/share Assuming that Mr. Jenkins does not request a specific election from the IRS, which of the following is accurate regarding the tax implications.

Mr. Jenkins will report $200 gross income at time of sale. Reason: Mr. Jenkins' basis in the shares was $65. Therefore, he reports a gain of $2/share or $200.

John operates his business as a sole proprietor. Last year, he hired the following two individuals: Melissa who keeps financial records and manages his billings and collections. Evan who cares for John's three-year-old son during the day and performs various personal errands that John cannot do because of his work load. Which of the following statements are accurate with respect to the tax consequences to John for these two employees? (Select all that apply.)

Only Melissa's wages are deductible. Both Melissa's and Evan's wages are subject to payroll tax.

Which of the following is not a form of equity-based compensation?

Performance-based cash bonus

Which of the following is false regardibg the minimum distribution rules for qualified retirement plans?

Plan participants must generally begin taking retirement distributions within one year following retirement. Reason: The requirement is no later than April 1 of the year following the year the participant reaches the age 70.5.

Which of the following statements regarding Health and Accident Insurance is false?

Premiums paid by employers for health insurance coverage provided to employees are not deductible by the employers. Reason: Premiums paid by employers for health insurance coverage provided to employees are deductible by the employers.

Which of the following statements is false with respect to qualified retirement plans?

Providing executives sufficient alternatives for retirement savings is an overriding policy objective of Congress in designing tax law.

Rachel, age 37, quit her job and received a distribution of $42,000 from her employer sponsored qualified retirement plan. She immediately purchased a car costing $27,000 and contributed the remaining $15,000 to a new qualified retirement plan. Which of the following statements is false?

Rachel will owe tax on the entire $42,000 distribution.

Which of the following does not describe equity-based compensation?

Requires a significant cash outlay by the employer.

Seven years ago, Bella Corporation granted Rob Rhodes an incentive stock option to purchase 1,000 shares of Bella stock at an exercise price of $70 per share, the stock price on the date of grant. This year Rob exercised those options when the stock price was $90. If Rob sells those shares in five years for $100 per share, ______.

Rob will recognize a $30,000 capital gain and there will be no tax consequence to Bella Reason: Rob will recognize a $30,000 capital gain (($100 - $70) × 1000 shares) and there will be no tax consequence to Bella.

In which of the following circumstances will the taxpayer be subject to a 10% penalty on a withdrawal from a qualified retirement plan?

Scott, age 40, withdraws funds after becoming unemployed. Reason: Scott has not reached 55 to meet the exception for employment termination. Therefore, Scott's withdrawal is subject to the 10% penalty.

Five years ago, TKO Corporation granted Maya Morris a non qualified option to purchase 1,000 shares of TKO stock at an exercise price of $70 per share, which reflected the stock price on the date of grant. This year, Maya exercised those options when the stock price was $90. What are the tax consequences on the exercise date to TKO and to Maya?

TKO: $20,000 deduction; Maya: $20,000 ordinary income

Which of the following statements regarding employee versus independent contractor status is false?

The IRS has a higher probability of collecting income and payroll tax from an independent contractor than from an employee. Reason: The IRS has a higher probability of collecting income and payroll tax from an employee because of the withholding requirements.

Which of the following statements is false regarding compensation paid to an owner of an S corporation?

The IRS may reclassify salary paid to an owner as a constructive dividend payment. Reason: In contrast to the case of a closely-held corporation, the IRS may reclassify the dividend to be a constructive salary payment.