ch 12 411
Tyler earns $80,000 per year and has a 22 percent marginal tax rate. His employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $4,680. How much salary should Tyler be willing to forgo to receive the $4,680 in health insurance coverage?
$4,680/(1-.22) = $6,000
Which of the following nontaxable fringe benefits have a maximum dollar amount that is NOT subject to tax? (Check all that apply.) Multiple select question. Qualified transportation fringe benefits No-additional-cost services Dependent care benefits Employer-paid health insurance premiums Employee educational assistance
Qualified transportation fringe benefits Dependent care benefits Employee educational assistance
Which one of the following characteristics applies to taxable fringe benefits? Multiple choice question. Employees are not subject to FICA tax on taxable fringe benefits. Employers are not allowed a deduction for taxable fringe benefits as they are not treated the same as cash compensation. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level.
The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee.
Tyler has a 24 percent marginal tax rate. His employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $5,040. If Tyler pays that same amount for health insurance premiums, he will need $7,000 in order to pay the premiums and the taxes on the compensation. How much of a cash flow savings is available to the company if it pays $5,040 for Tyler's health insurance, rather than $7,000 in compensation assuming the company has a 21 percent tax rate?
1548
Which one of the following statements is INCORRECT when referring to flexible spending accounts (FSAs)? Multiple choice question. Any money remaining in the account after the first two and a half months following the year end will be forfeited by the employee. The money in the account is set aside "before-tax" meaning that the money in the account is not subject to income tax. Any money in the account at year end may be withdrawn and is taxable to the employee when received. The money in the account must be used for qualified medical-related expenses or dependent care.
Any money in the account at year end may be withdrawn and is taxable to the employee when received.
The difference between the exercise price and the market value of the acquired shares on the date of exercise is called the
Blank 1: bargain Blank 2: element
A allows employees to choose their fringe benefit package up to a determined amount from a menu of options. The employee may receive cash in lieu of forgone benefits.
Blank 1: cafeteria Blank 2: plan
The bargain element is equal to the difference between the price and the fair value of the acquired shares on the date of exercise.
Blank 1: exercise or strike Blank 2: market or fair market
The bargain element is taxed as ordinary income on the exercise date for stock options, but NOT for stock options unless specific required holding periods are not met.
Blank 1: nonqualified or NQO Blank 2: incentive or ISO
Employees who receive compensation in the form of stock do not have to pay for it, but forfeit ownership if they quit before the date.
Blank 1: restricted Blank 2: vesting or vest
The type of compensation where employees receive a fixed amount regardless of the amount of hours worked is called a(n) . The type of compensation that is based on the number of hours worked is called . Both types of compensation are taxed at to employees as income and are subject to tax which includes Social Security and Medicare.
Blank 1: salary or salaries Blank 2: wages, hourly, or wage Blank 3: ordinary or marginal Blank 4: FICA
Nontaxable fringe benefits are very attractive to employees because their after-tax cost for these benefits is . The cost of the benefits is (nondeductible/deductible) for the employer.
Blank 1: zero, 0, or nothing Blank 2: deductible
Which of the following nontaxable fringe benefits have a maximum dollar amount that is NOT subject to tax? (Check all that apply.) Multiple select question. Dependent care benefits No-additional-cost services Employee educational assistance Qualified transportation fringe benefits Employer-paid health insurance premiums
Dependent care benefits Employee educational assistance Qualified transportation fringe benefits
Which of the following characteristics apply to taxable fringe benefits? (Check all that apply.) Multiple select question. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit. Employers treat the taxable fringe benefits the same as cash compensation. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee.
Employees are taxed on the value of the benefit, rather than the cost paid for the benefit. Employers treat the taxable fringe benefits the same as cash compensation. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee.
Which of the following choices is a characteristic of stock options? Multiple choice question. If the market price is below the strike price, the employee may purchase the stock at FMV and sell it to the company for the option price. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. Employees must exercise their options on the vesting date regardless of the market price.
Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates.
Which of the following choices are characteristics of stock options? (Check all that apply.) Multiple select question. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. The employee will receive the stock on the vesting date without having to pay for it. Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. Employees may choose NOT to exercise their options if the market value of the shares is below the strike price. If the market price is below the strike price, the employee may purchase the stock at FMV and sell it to the company for the option price.
Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. Employees may choose NOT to exercise their options if the market value of the shares is below the strike price.
Stock options
Employees must use cash to purchase the employer's stock once the vesting date is reached.
Restricted stock
Employees receive the stock on the vesting date without having to pay for it.
Why do employees prefer ISOs to NQOs? Multiple choice question. Employees who sell stock that was purchased with NQOs will recognize ordinary income on the entire realized gain regardless of holding period. Employees who meet the required holding period for ISOs will treat the difference between the sales proceeds and exercise price as a long-term capital gain. The bargain element is NOT taxed for ISOs which results in a lower gain to the employee when the stock is sold. ISOs result in gains that are exempt from taxation in the year the employee disposes of the stock.
Employees who meet the required holding period for ISOs will treat the difference between the sales proceeds and exercise price as a long-term capital gain.
Which of the following fringe benefits are nontaxable fringe benefits for the recipient? (Check all that apply.) Multiple select question. Employer-paid health insurance Season tickets for the local NFL team A below-market loan provided to an employee who needed an advance on his pay Employer-paid premiums on a $50,000 group-term life insurance policy The cost of meals and lodging that is for the convenience of the employer
Employer-paid health insurance Employer-paid premiums on a $50,000 group-term life insurance policy The cost of meals and lodging that is for the convenience of the employer
Which of the following statements is INCORRECT regarding the timing of employer deductions for compensation and the employees' inclusion of compensation in gross income? Multiple choice question. Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation. Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method. Employers using the cash method of accounting must deduct salaries and wages in the year they pay the employees. When the employer and the employee are related, the employer must deduct wages expense in the same year the employee reports it as gross income.
Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method.
Which of the following characteristics apply to taxable fringe benefits? (Check all that apply.) Multiple select question. Employers treat the taxable fringe benefits the same as cash compensation. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit.
Employers treat the taxable fringe benefits the same as cash compensation. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit
Which of the following statements is correct regarding employers' treatment of salaries and wages? Multiple choice question. Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation. Employers using the cash method of accounting must deduct salaries and wages in the year the employees earn the compensation. Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method. When the employer and the employee are related parties, both parties must use the accrual method to recognize the deduction and the income.
Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation.
Which of the following choices is NOT an advantage of equity-based compensation? Multiple choice question. Equity-based compensation is exempt from taxation for the employees. If the company's stock price increases after options are granted, the employees may benefit greatly. Equity-based compensation allows companies to reward employees without incurring cash outflows. Equity-based compensation motivates employees to take ownership in their company.
Equity-based compensation is exempt from taxation for the employees.
Employees must pay which of the following taxes on taxable fringe benefits? (Choose all that apply.) Multiple select question. gift tax sales and use tax FICA taxes federal income tax
FICA taxes federal income tax
What is the advantage of having a cafeteria plan over a standard package of benefits? Multiple choice question. In a cafeteria plan, the employee can choose the benefits that are best suited to his or her situation. In a cafeteria plan, any cash received in lieu of benefits is a nontaxable fringe benefit. In a cafeteria plan, the employer chooses the benefits package that will be received by each employee. In a cafeteria plan, an employee can receive a higher level of benefits than is offered in a standard plan.
In a cafeteria plan, the employee can choose the benefits that are best suited to his or her situation.
Van Winkle received stock options from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock several months later for $38 per share. What is the total bargain element on Van's stock?
Reason: ($32-$20) x 100; $12 x 100 = $1,200
Concerning employees, which of the following statements is INCORRECT when considering fringe benefits? Employees must pay FICA tax in addition to income tax on taxable fringe benefits. Taxable fringe benefits are generally available to all employees on a nondiscriminatory basis. Taxable fringe benefits are taxed at ordinary rates. Taxable fringe benefits are treated like cash compensation.
Taxable fringe benefits are generally available to all employees on a nondiscriminatory basis.
Concerning employees, which of the following statements is INCORRECT when considering fringe benefits? Multiple choice question. Taxable fringe benefits are treated like cash compensation. Taxable fringe benefits are generally available to all employees on a nondiscriminatory basis. Taxable fringe benefits are taxed at ordinary rates. Employees must pay FICA tax in addition to income tax on taxable fringe benefits.
Taxable fringe benefits are generally available to all employees on a nondiscriminatory basis.
How is the amount of the employer's tax deduction for restricted stock determined? Multiple choice question. The amount of the deduction equals the fair market value of the stock on the vesting date. The employer does not receive a tax deduction for issuing restricted stock to its employees. The amount of the deduction equals the ordinary income that is recognized by the employees. The amount of the deduction equals the fair market value of the stock on the grant date.
The amount of the deduction equals the ordinary income that is recognized by the employees.
How is the amount of the employer's tax deduction for restricted stock determined? Multiple choice question. The employer does not receive a tax deduction for issuing restricted stock to its employees. The amount of the deduction equals the fair market value of the stock on the vesting date. The amount of the deduction equals the ordinary income that is recognized by the employees. The amount of the deduction equals the fair market value of the stock on the grant date.
The amount of the deduction equals the ordinary income that is recognized by the employees.
Which of the following fringe benefits are nontaxable fringe benefits for the recipient? (Check all that apply.) Multiple select question. Cash received in lieu of other benefits included in a cafeteria plan The cost of lodging provided to an apartment manager who is required to live on the premises Reimbursement of the cost of moving household goods across the country due to a change in employment Providing mass transit passes to employees who take the subway to work
The cost of lodging provided to an apartment manager who is required to live on the premises Providing mass transit passes to employees who take the subway to work
Which one of the following characteristics applies to taxable fringe benefits? Multiple choice question. Employers are not allowed a deduction for taxable fringe benefits as they are not treated the same as cash compensation. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employees are not subject to FICA tax on taxable fringe benefits. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level.
The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee
Which one of the following characteristics applies to taxable fringe benefits? Multiple choice question. Employees are not subject to FICA tax on taxable fringe benefits. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employers are not allowed a deduction for taxable fringe benefits as they are not treated the same as cash compensation. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level.
The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee.
Which of the following characteristics apply to taxable fringe benefits? (Check all that apply.) Multiple select question. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employers treat the taxable fringe benefits the same as cash compensation. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit.
The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employers treat the taxable fringe benefits the same as cash compensation. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit.
Which of the following characteristics apply to taxable fringe benefits? (Check all that apply.) Multiple select question. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level. Employers treat the taxable fringe benefits the same as cash compensation. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit.
The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employers treat the taxable fringe benefits the same as cash compensation. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit.
What is the tax treatment for the employer when restricted stock is granted to employees? Multiple choice question. The deduction equals the ordinary income recognized by the employee and is deducted on the grant date regardless of the Sec. 83(b) election. The deduction equals the ordinary income recognized by the employee and the timing is based on whether or not Sec. 83(b) is elected. The employer does NOT receive a tax deduction for issuing restricted stock to employees. The deduction equals the ordinary income recognized by the employee and is deducted on the vesting date regardless of the Sec. 83(b) election.
The deduction equals the ordinary income recognized by the employee and the timing is based on whether or not Sec. 83(b) is elected.
Which of the following choices is a characteristic of restricted stock? Multiple choice question. Employees must purchase the stock on the vesting date regardless of the market price. Employees must use cash to purchase the employer's stock once the vesting date is reached. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. The employee is not required to pay for the stock but rather is given the shares on the grant date.
The employee is not required to pay for the stock but rather is given the shares on the grant date.
Which of the following choices are characteristics of restricted stock? (Check all that apply.) Multiple select question. Employees must use cash to purchase the employer's stock once the vesting date is reached. The employee is not required to pay for the stock but rather is given the shares on the grant date. The employee may sell the stock immediately after the vesting date or retain it, but there is NO required holding period. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date.
The employee is not required to pay for the stock but rather is given the shares on the grant date. The employee may sell the stock immediately after the vesting date or retain it, but there is NO required holding period.
What is the tax treatment of nonqualified stock options for employers? Multiple choice question. The employer deducts the bargain element of the option on the date the employee exercises his/her options. The employer receives a tax deduction for the exercise price on the date the employee purchases the stock. The employer does NOT receive a tax deduction for nonqualified stock options. The employer receives a tax deduction for the exercise price on the grant date (the date the options are given to the employee).
The employer deducts the bargain element of the option on the date the employee exercises his/her options.
What is the tax treatment of nonqualified stock options for employers? Multiple choice question. The employer receives a tax deduction for the exercise price on the grant date (the date the options are given to the employee). The employer receives a tax deduction for the exercise price on the date the employee purchases the stock. The employer does NOT receive a tax deduction for nonqualified stock options. The employer deducts the bargain element of the option on the date the employee exercises his/her options.
The employer deducts the bargain element of the option on the date the employee exercises his/her options.
What is the tax treatment of nonqualified stock options for employers? The employer deducts the bargain element of the option on the date the employee exercises his/her options. The employer receives a tax deduction for the exercise price on the date the employee purchases the stock. The employer receives a tax deduction for the exercise price on the grant date (the date the options are given to the employee). The employer does NOT receive a tax deduction for nonqualified stock options.
The employer deducts the bargain element of the option on the date the employee exercises his/her options.
What is the tax treatment of incentive stock options for employers? Multiple choice question. The employer receives a tax deduction for the exercise price on the grant date (the date the options are given to the employee). The employer deducts the bargain element of the option on the date the employee exercises his/her options. The employer receives a tax deduction for the exercise price on the date the employee purchases the stock. The employer does NOT receive a tax deduction for incentive stock options.
The employer does NOT receive a tax deduction for incentive stock options.
Which of the following statements is INCORRECT when describing the advantages and disadvantages of making a Section 83(b) election for restricted stock? Multiple choice question. The market value of the stock is taxed as ordinary income on the grant date, providing a tax advantage if the value increases after that date. The election allows the employee to potentially convert part of the ordinary income resulting from receiving the stock to long-term capital gain. The market value of the stock is taxed at the lower capital gains rate on the grant date. If employment is terminated before the vesting date, the employee can NOT recoup the tax that was paid on the grant date or receive the stock.
The market value of the stock is taxed at the lower capital gains rate on the grant date.
Why are nontaxable fringe benefits attractive to both the employer and the employees? Multiple choice question. The employees are NOT taxed on the benefit until it is used/received and the employer receives a tax deduction for the cost of providing the benefit. The net after-tax cost to employees is zero and the employer may provide the benefits on a discriminatory basis. The net after-tax cost to employees is zero and the employer receives a tax deduction for the cost of the benefit. The net after-tax cost to employees is zero, but the employer receives NO tax deduction for the cost of the benefit.
The net after-tax cost to employees is zero and the employer receives a tax deduction for the cost of the benefit.
Why are nontaxable fringe benefits attractive to both the employer and the employees? Multiple choice question. The net after-tax cost to employees is zero, but the employer receives NO tax deduction for the cost of the benefit. The employees are NOT taxed on the benefit until it is used/received and the employer receives a tax deduction for the cost of providing the benefit. The net after-tax cost to employees is zero and the employer receives a tax deduction for the cost of the benefit. The net after-tax cost to employees is zero and the employer may provide the benefits on a discriminatory basis.
The net after-tax cost to employees is zero and the employer receives a tax deduction for the cost of the benefit.
Why are nontaxable fringe benefits attractive to both the employer and the employees? Multiple choice question. The net after-tax cost to employees is zero, but the employer receives NO tax deduction for the cost of the benefit. The net after-tax cost to employees is zero and the employer receives a tax deduction for the cost of the benefit. The employees are NOT taxed on the benefit until it is used/received and the employer receives a tax deduction for the cost of providing the benefit. The net after-tax cost to employees is zero and the employer may provide the benefits on a discriminatory basis.
The net after-tax cost to employees is zero and the employer receives a tax deduction for the cost of the benefit.
Which of the following statements is correct when describing the tax treatment to the employees of stock options? Multiple choice question. The bargain element is taxed as ordinary income on the vesting date for both ISOs and NQOs. There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs. The bargain element is taxed as ordinary income on the grant date for ISOs. The bargain element is taxed as ordinary income on the grant date for NQOs.
There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs.
Which of the following statements is correct when describing the tax treatment to the employees of stock options? Multiple choice question. There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs. The bargain element is taxed as ordinary income on the grant date for ISOs. The bargain element is taxed as ordinary income on the vesting date for both ISOs and NQOs. The bargain element is taxed as ordinary income on the grant date for NQOs.
There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs.
How are salaries and wages taxed? (Check all that apply.) Multiple select question. They are subject to FICA tax. They are taxed when earned, rather than when the money is received. They are taxed as ordinary income. They are taxed when received, rather than when earned. They are taxed as capital gains.
They are subject to FICA tax. They are taxed as ordinary income. They are taxed when received, rather than when earned.
True or false: Employees prefer to receive ISOs rather than NQOs because any gain on the subsequent sale of the stock may be taxed as a long-term capital gain if the required holding periods are met.
True
Van Winkle received incentive stock options (ISOs) from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock two years later for $48 per share. Assuming he meets the required holding periods to qualify for the tax treatment afforded incentive stock options, which of the following choices is correct?
Van's gain on the sale will be a $2,800 long-term capital gain.
A small benefit received from working in a company, such as the freedom to make a few personal copies or use the fax machine, is referred to as a: Multiple choice question. de minimis fringe benefit working condition fringe benefit cafeteria plan qualified employee discount
de minimis fringe benefit
compensation can provide motivational effects to employees and cash flow benefits to the company.
equity-based
Accounts in which employees are allowed to set aside a portion of their before-tax salary to pay either health and/or dependent-care benefits are called: Multiple choice question. Patient Protection and Affordable Care accounts flexible spending accounts medical expense accounts cafeteria plan accounts
flexible spending accounts
By making a Section 83(b) election, the employee is taxed on the value of the restricted stock on the date, rather than the date.
grant vesting
For both incentive stock options and nonqualified stock options, there are no tax consequences on either the date or the date.
grant vesting
Restricted stock is taxed to employees at ______.
ordinary rates on the full market value of the shares on the date the restricted stock vests
Employees receiving restricted stock are taxed on the fair market value of the shares on the date (absent an election).
vesting
