Question 1

Compare a § 401(k) plan with an IRA.

Accepted Answer

An instructor can use Concept Summary 19.4 to cover this comparison. Most employees will find a § 401(k) plan more attractive than an IRA. Probably the biggest limitation of an IRA is the $5,500 maximum shelter in 2017 (ignoring the catch-up provision). Under § 401(k), employees are permitted to shelter compensation up to $18,000 (in 2017). The restrictions on deducting contributions to IRAs for many middle-income and upper-income taxpayers may cause many employees to utilize § 401(k) plans more frequently.
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Another difference between § 401(k) plans and IRAs is the manner in which the money is treated. Money placed in an IRA may be tax deductible, whereas dollars placed in a § 401(k) plan are considered to be deferred compensation. Thus, a § 401(k) reduction may reduce profit sharing payments, group term life insurance, and Social Security benefits.
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Question 2

Income is taxed if a taxpayer's control over the amount earned is subject to substantial restrictions.

Accepted Answer

A) True 
 B)False  False

Question 3

Dana contributes $2,000 too much to a § 401(k) plan which is not returned within 2 1/2 months after the close of the tax year. The employer will have to pay a tax of $200.

Accepted Answer

A) True 
 B)False  True

Question 4

On February 1, 2017, Tuan withdrew $15,000 from his IRA #1. He deposited the funds back into IRA #1 within 60 days (a"rollover"). Tuan may do one more nontaxable rollover distribution from either IRA #1 or IRA #2 starting in April 2017.

Accepted Answer

A) True 
 B)False

Question 5

If a taxpayer receives an early distribution from a qualified retirement plan, a 10% additional tax is levied on the full amount of any distribution includible in gross income.

Accepted Answer

A) True 
 B)False

Question 6

Roxy, Inc., grants 1,000 NQSO to an employee, Carol, entitling her to purchase Roxy stock at $10 per share (the current price of the stock). Roxy simultaneously grants 1,000 ISOs to another employee, Donna, entitling her to buy 1,000 shares of Roxy at $10 per share over a two-year period. One year later, 2017, the stock has risen to $20 per share, and Carol and Donna both exercise their options in full, receiving stock not subject to an SRF.
a.What happens to Carol tax-wise in 2017?
b.What happens to Donna tax-wise in 2017?
c.What happens to Roxy, Inc., tax-wise in 2017?
d.What happens to Carol tax-wise in 2019 when she sells her stock for $37?
e.What happens to Donna tax-wise in 2019 when she sells her stock for $38?
f. What happens to Roxy, Inc., tax-wise in 2019 with respect to these transactions?

Accepted Answer

The answer of Roxy, Inc., grants 1,000 NQSO to an...

Question 7

What statement is false with respect to an incentive stock option (ISO)?

Accepted Answer

A) To qualify as an ISO, the option price must equal or exceed the fair market value of the stock at the time the option is granted. 
B) The spread is not subject to the alternative minimum tax. 
C) If the employee meets the holding period requirement, the employer does not obtain a business deduction. 
D) The spread is the excess of the FMV of the share at the date of exercise over the option price. 
E) None of the above are false. 
A) To qualify as an ISO, the option price must equal or exceed the fair market value of the stock at the time the option is granted. 
B) The spread is not subject to the alternative minimum tax. 
C) If the employee meets the holding period requirement, the employer does not obtain a business deduction. 
D) The spread is the excess of the FMV of the share at the date of exercise over the option price. 
E) None of the above are false.

Question 8

In a stock bonus plan, contributions are dependent on the employer's profits.

Accepted Answer

A) True 
 B)False

Question 9

Which is not an advantage of a § 401(k) plan over a traditional IRA?

Accepted Answer

A) Deduction limitation. 
B) Early withdrawal option without penalty. 
C) Loans from the plan. 
D) Record keeping. 
E) All of the above are advantages of § 401(k) plan. 
A) Deduction limitation. 
B) Early withdrawal option without penalty. 
C) Loans from the plan. 
D) Record keeping. 
E) All of the above are advantages of § 401(k) plan.

Question 10

Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach. What amount is deductible by the program in 2017 his first full year of employment.

Accepted Answer

A) None 
B) $1,000,000 
C) $3,000,000 
D) $4,500,000 
E) None of the above 
A) None 
B) $1,000,000 
C) $3,000,000 
D) $4,500,000 
E) None of the above

Question 11

Group life insurance is considered a deferred compensation plan.

Accepted Answer

A) True 
 B)False

Question 12

The compensation paid by Purple Corporation to the plan participants of a profit sharing plan in 2017 was $38,300. During 2017, Purple Corporation contributed $10,000 to the plan. Purple's deductible amount for 2017 is what amount, if any?

Accepted Answer

A) $0 
B) $7,660 
C) $9,575 
D) $10,000 
E) None of the above 
A) $0 
B) $7,660 
C) $9,575 
D) $10,000 
E) None of the above

Question 13

Jana has $225,000 of earned income in 2017. Calculate the amount she can contribute to a SEP.

Accepted Answer

A) $22,500 
B) $24,500 
C) $54,000 
D) $55,000 
E) None of the above 
A) $22,500 
B) $24,500 
C) $54,000 
D) $55,000 
E) None of the above

Question 14

In a profit sharing plan, a separate account is not maintained for each participant.

Accepted Answer

A) True 
 B)False

Question 15

If a person has funds from sources other than retirement assets when he or she retires, which retirement asset should be spent first?

Accepted Answer

The most tax-efficient result is to post

Question 16

A major disadvantage of a NQSO is that an employee must recognize ordinary income on the exercise of the option or at the date of the grant without receiving cash to pay the tax.

Accepted Answer

A) True 
 B)False

Question 17

Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).

Accepted Answer

Defined benefit and defined contribution

Question 18

Which statement is true with respect to golden parachute payments?

Accepted Answer

A) Refers to excess severance pay. 
B) Does not include payments from a qualified profit sharing plan. 
C) A deduction is denied to the employer. 
D) A 20% excise tax is imposed on the recipient. 
E) All of the above are true. 
A) Refers to excess severance pay. 
B) Does not include payments from a qualified profit sharing plan. 
C) A deduction is denied to the employer. 
D) A 20% excise tax is imposed on the recipient. 
E) All of the above are true.

Question 19

A NQDC plan cannot discriminate in favor of officers or other highly compensated employees.

Accepted Answer

A) True 
 B)False

Question 20

Yvonne exercises incentive stock options (ISOs) for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21, 2017, when the fair market value is $120 per share. She holds the stock for only seven months and sells the shares for $140 per share. Determine the recognized gain on the sale and classify it as capital or ordinary.

Accepted Answer

A) $2,000 ordinary income and $2,000 STCG. 
B) $2,000 ordinary income and $2,000 LTCG. 
C) $4,000 ordinary income. 
D) $4,000 LTCG. 
E) None of the above. 
A) $2,000 ordinary income and $2,000 STCG. 
B) $2,000 ordinary income and $2,000 LTCG. 
C) $4,000 ordinary income. 
D) $4,000 LTCG. 
E) None of the above.

Compare a § 401(k) plan with an IRA.

Income is taxed if a taxpayer's control over the amount earned is subject to substantial restrictions.

Dana contributes $2,000 too much to a § 401(k) plan which is not returned within 2 1/2 months after the close of the tax year. The employer will have to pay a tax of $200.

On February 1, 2017, Tuan withdrew $15,000 from his IRA #1. He deposited the funds back into IRA #1 within 60 days (a"rollover"). Tuan may do one more nontaxable rollover distribution from either IRA #1 or IRA #2 starting in April 2017.

If a taxpayer receives an early distribution from a qualified retirement plan, a 10% additional tax is levied on the full amount of any distribution includible in gross income.

What statement is false with respect to an incentive stock option (ISO)?

In a stock bonus plan, contributions are dependent on the employer's profits.

Which is not an advantage of a § 401(k) plan over a traditional IRA?

Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach. What amount is deductible by the program in 2017 his first full year of employment.

Group life insurance is considered a deferred compensation plan.

The compensation paid by Purple Corporation to the plan participants of a profit sharing plan in 2017 was $38,300. During 2017, Purple Corporation contributed $10,000 to the plan. Purple's deductible amount for 2017 is what amount, if any?

Jana has $225,000 of earned income in 2017. Calculate the amount she can contribute to a SEP.

In a profit sharing plan, a separate account is not maintained for each participant.

If a person has funds from sources other than retirement assets when he or she retires, which retirement asset should be spent first?

A major disadvantage of a NQSO is that an employee must recognize ordinary income on the exercise of the option or at the date of the grant without receiving cash to pay the tax.

Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).

Which statement is true with respect to golden parachute payments?

A NQDC plan cannot discriminate in favor of officers or other highly compensated employees.

An Introduction to Taxation and Understanding Federal Tax Law

Working With the Tax Law

Tax Formula and Tax Determination; an Overview of Property Transactions

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: in General

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Investor Losses

Alternative Minimum Tax

Tax Credits and Payment Procedures

Property Transactions: Determination of Gain or Loss and Basis Considerations

Property Transactions: Nontaxable Exchanges

Property Transactions: Capital Gains and Losses

Property Transactions: 1231 and Recapture Provisions

Accounting Periods and Methods

Corporations and Partnerships

Filters

Exam 19: Deferred Compensation

Compare a § 401(k) plan with an IRA.

Income is taxed if a taxpayer's control over the amount earned is subject to substantial restrictions.

Dana contributes $2,000 too much to a § 401(k) plan which is not returned within 2 1/2 months after the close of the tax year. The employer will have to pay a tax of $200.

On February 1, 2017, Tuan withdrew $15,000 from his IRA #1. He deposited the funds back into IRA #1 within 60 days (a"rollover"). Tuan may do one more nontaxable rollover distribution from either IRA #1 or IRA #2 starting in April 2017.

If a taxpayer receives an early distribution from a qualified retirement plan, a 10% additional tax is levied on the full amount of any distribution includible in gross income.

What statement is false with respect to an incentive stock option (ISO)?

In a stock bonus plan, contributions are dependent on the employer's profits.

Which is not an advantage of a § 401(k) plan over a traditional IRA?

Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach. What amount is deductible by the program in 2017 his first full year of employment.

Group life insurance is considered a deferred compensation plan.

The compensation paid by Purple Corporation to the plan participants of a profit sharing plan in 2017 was $38,300. During 2017, Purple Corporation contributed $10,000 to the plan. Purple's deductible amount for 2017 is what amount, if any?

Jana has $225,000 of earned income in 2017. Calculate the amount she can contribute to a SEP.

In a profit sharing plan, a separate account is not maintained for each participant.

If a person has funds from sources other than retirement assets when he or she retires, which retirement asset should be spent first?

A major disadvantage of a NQSO is that an employee must recognize ordinary income on the exercise of the option or at the date of the grant without receiving cash to pay the tax.

Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).

Which statement is true with respect to golden parachute payments?

A NQDC plan cannot discriminate in favor of officers or other highly compensated employees.

An Introduction to Taxation and Understanding Federal Tax Law

Working With the Tax Law

Tax Formula and Tax Determination; an Overview of Property Transactions

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: in General

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Investor Losses

Alternative Minimum Tax

Tax Credits and Payment Procedures

Property Transactions: Determination of Gain or Loss and Basis Considerations

Property Transactions: Nontaxable Exchanges

Property Transactions: Capital Gains and Losses

Property Transactions: 1231 and Recapture Provisions

Accounting Periods and Methods

Corporations and Partnerships

Filters