Deck 15: Compensation and Retirement Planning

Question 1

Stock options are a form of compensation that requires a substantial cash outlay by the corporate employer.

Answer 1

False

Question 2

An employee who receives restricted stock as compensation from a corporate employer must include the stock's fair market value in gross income in the year of receipt, even though the employee's ownership rights in the stock are nonvested.

Answer 2

False

Question 3

In 2020, Largo Inc., a calendar year corporation, accrued a $45,000 year-end bonus payable to its communications director. Largo and the director are not related parties. Largo paid the bonus to the director on April 3, 2021. Dargo can deduct the bonus in 2020.

Answer 3

False

Question 4

The value of employer-provided health insurance is excluded from the employee's gross income.

Question 5

An independent contractor is not entitled to the same fringe benefits as an employee.

Question 6

An employee recognizes taxable income if his employer provides group-term life insurance coverage in excess of $50,000.

Question 7

Olan Inc. provides an on-site day care center free of charge to employees who have pre-school children. Employees who enroll their children may exclude the value of this fringe benefit from gross income.

Question 8

A cafeteria plan allows employees to select between a variety of nontaxable fringe benefits or taxable cash compensation.

Question 9

In 2020, Dargo Inc., a calendar year corporation, accrued a $75,000 year-end bonus payable to its communications director. Dargo and the director are not related parties. Dargo paid the bonus to the director on February 8, 2021. Dargo can deduct the bonus in 2020.

Question 10

The IRS is less likely to raise the issue of reasonable compensation during the audit of a publicly held corporation than a closely held corporation.

Question 11

Employees don't include the value of any compensatory fringe benefits in gross income because the benefit doesn't consist of a direct cash payment.

Question 12

Mr. Hazel, the principal executive officer of a publicly held corporation, received $2.5 million compensation this year. The compensation consisted of an $800,000 base salary and a $1.7 million year-end bonus for outstanding performance. The corporation is allowed to deduct the entire amount of Mr. Hazel's compensation.

Question 13

A corporation that transfers restricted stock to an employee as compensation may deduct the stock's fair market value in the year of transfer even if the employee doesn't recognize the value as gross income in the year of transfer.

Question 14

The value of a nontaxable fringe benefit is different for each employee because employees have different financial needs and consumption preferences.

Question 15

An S corporation generated $160,000 ordinary taxable income this year. The shareholders must pay both income and self-employment tax on their pro rata shares of this income.

Question 16

A shareholder-employee of an S corporation prefers to receive a greater salary rather than a greater pro-rata share of corporate taxable income.

Question 17

Self-employed individuals are allowed to deduct the cost of health insurance for themselves and their families only as an itemized deduction.

Question 18

Self-employed individuals have fewer opportunities than employees to underpay income and payroll taxes.

Question 19

Employers must withhold state and federal income tax from compensation paid to independent contractors.

Question 20

Wages paid by an employer to an employee who is the employer's child under age 18 are not subject to federal FICA and unemployment taxes.

Question 21

A Keogh plan maintained for the owner of an unincorporated business must cover all employees of the business on a nondiscriminatory basis.

Question 22

The 10% penalty imposed on premature withdrawals from qualified retirement plans is intended to discourage participants from withdrawing funds before retirement.

Question 23

Employers typically use nonqualified deferred compensation plans to provide additional retirement savings for rank-and-file employees.

Question 24

Employees typically recognize compensation income in the year in which they are granted stock options.

Question 25

Keogh plans allow self-employed individuals to save for retirement on a tax-deferred basis.

Question 26

Section 401(k) plans allow employees to contribute a portion of their current wages or salary to a tax-exempt retirement account. However, the contributed portion is still taxable compensation to the employee.

Question 27

Profit-sharing plans and employee stock ownership plans are examples of defined-benefit plans.

Question 28

A stock option is the right to purchase the stock of a corporate employer at a stated price for an indefinite period of time.

Question 29

Nonqualified deferred compensation plans are prohibited from discriminating in favor of highly compensated employees.

Question 30

Carl Meyer, age 56, terminated his employment with his corporate employer because he wanted to begin a second career as a freelance photographer. If Carl withdraws funds from his employer-sponsored qualified plan, he will pay the 10% premature withdrawal penalty.

Question 31

Employees who save for retirement through an employer-sponsored qualified plan never include the earnings on their savings in gross income.

Question 32

Unreimbursed employment-related business expenses are an itemized deduction.

Question 33

Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than April 1^st of the year following the year in which they reach age 72.

Question 34

New companies and those with volatile earnings and uncertain cash flows generally prefer defined-contribution plans to defined-benefit plans.

Question 35

Reimbursed employment-related business expenses have no net effect on the employee's taxable income.

Question 36

Unreimbursed moving expenses are an itemized deduction.

Question 37

Defined-contribution plans provide participants with a targeted retirement benefit, typically in the form of a monthly pension.

Question 38

This year, Larry was awarded a bonus by his corporate employer that will be paid in five annual installments beginning in the year Larry retires. The employer's liability for the future payment is unfunded. Even though Larry earned the bonus this year, he does not recognize any current income.

Question 39

An employer is allowed to deduct the accrued expense for the employer's liability to pay nonqualified deferred compensation.

Question 40

Contributions to an employer-sponsored qualified retirement plan are deductible by the employer in the year of contribution but are not included in the employees' gross income.

Question 41

Lansing Corporation, a publicly held company with a 21% tax rate, paid its PEO an annual salary of $1 million plus a year-end bonus of $500,000 million. The bonus was based on a targeted amount of annual gross revenue. Ignoring payroll taxes, calculate the after-tax cost of this payment.

A) $1.5 million
B) $1.29 million
C) $1.185 million
D) $0

Question 42

A sole proprietor in the 37% tax bracket pays her 16-year-old son a reasonable salary of $14,000 for services performed for the proprietorship. Compute the family's income tax savings if the son has no other income and takes a $12,400 standard deduction.

A) $5,020
B) $5,180
C) $4,440
D) None of these choices are correct

Question 43

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

A) The determination as to whether a worker is an employee or an independent contractor is based on a subjective set of guidelines.
B) An employer has a financial incentive to classify a worker as an independent contractor instead of an employee.
C) The IRS has a higher probability of collecting income and payroll taxes from an independent contractor than from an employee.
D) If the IRS reclassifies a worker from independent contractor to employee, the employer can become liable for the employee's share of unpaid payroll taxes.

Question 44

Lansing Corporation, a publicly held company with a 21% tax rate, paid its PEO an annual salary of $2.3 million. Ignoring payroll taxes, calculate the after-tax cost of this payment.

A) $2.3 million
B) $1.817 million
C) $2.09 million
D) $0

Question 45

Both traditional IRAs and Roth IRAs are tax-exempt accounts.

Question 46

A Keogh plan for the benefit of a self-employed individual is considered a nonqualified retirement plan.

Question 47

Which of the following statements concerning the client-independent contractor relationship is false?

A) A client may only accept or reject the final results of the work of an independent contractor.
B) An independent contractor is entitled to all the fringe benefits offered to the client's employees.
C) At the end of each tax year, a client issues a Form 1099 to an independent contractor reporting the compensation paid during the year.
D) An independent contractor must pay both income tax and self-employment tax.

Question 48

Traditional IRAs but not Roth IRAs are subject to a minimum distribution requirement after the owner reaches age 72.

Question 49

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

A) An employee has the right to direct and control how her duties are performed.
B) An employer generally sets the employee's work schedule.
C) At the end of each tax year, an employer issues a Form 1099 to each employee reporting the compensation paid during the year.
D) An employee must pay self-employment taxes.

Question 50

Any individual taxpayer who earns any amount of compensation or self-employment income can contribute $6,000 to a traditional IRA.

Question 51

Which of the following is not a factor considered by the courts when evaluating the reasonableness of an employee's compensation?

A) The number of hours worked and the duties performed by the employee.
B) The amount of compensation paid by other corporate employers in the same line of business to unrelated employees performing the same or similar services.
C) The employee's education and years of experience.
D) All of the above factors are considered.

Question 52

Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., a regular corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?

A) The IRS can treat the $50,000 payment as a constructive dividend to the son.
B) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs. Williams. Such treatment has no effect on Lessing Inc.
C) The IRS can disallow Lessing's $50,000 deduction for the son's salary. Such treatment has no effect on Mr. and Mrs. Williams.
D) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs. Williams and can disallow Lessing's $50,000 deduction for the son's salary.

Question 53

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

A) Cash basis employees must report wages in the year payment is actually or constructively received.
B) Employees may elect whether or not their employer withholds income and payroll taxes from their wages.
C) Whether wages are currently deductible by the employer depends on the type of services rendered by the employee.
D) Wages paid to business employees are either deductible by the employer or treated as a capitalized cost.

Question 54

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

A) Expatriates may not claim a foreign tax credit for foreign tax paid on excluded income.
B) The exclusion is limited to an inflation-adjusted annual dollar amount.
C) The exclusion is available to any U.S. citizen employed by a foreign company.
D) The exclusion is available to any U.S. citizen working and residing in a foreign country on an extended basis.

Question 55

Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., an S corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?

A) The IRS can disallow Lessing's $50,000 deduction for the son's salary. Such treatment will increase the amount of income recognized by Mr. and Mrs. Williams.
B) The IRS can treat the $50,000 payment as a constructive dividend to the son.
C) The IRS can disallow Lessing's $50,000 deduction for the son's salary. Such treatment has no effect on Mr. and Mrs. Williams..
D) The discovery has no tax consequences to Mr. and Mrs. Williams or their son.

Question 56

Lawrence is a U.S. citizen who has worked in his employer's Paris office for the past five years. Compute Lawrence's 2020 AGI if his only item of income was his $130,000 salary.

A) $130,000
B) $107,600
C) $22,400
D) $0

Question 57

Qualified withdrawals from both traditional and Roth IRAs are tax-exempt.

Question 58

Julie, a single individual, is employed by Dashell Inc. but doesn't participate in any employer-sponsored retirement plan. Julie's annual contribution to her traditional IRA is deductible.

Question 59

Jason, a single individual, is employed by KLD Inc. but doesn't participate in any employer-sponsored retirement plan. Jason's annual contribution to his Roth IRA is deductible.

Question 60

Mrs. Connelly, a self-employed individual, maintains a defined-contribution Keogh plan. Regardless of the amount of her self-employment income, Mrs. Connelly may contribute $57,000 to the Keogh plan in 2020.

Question 61

In 2011, Mr. Delgado exercised an option to purchase 1,000 shares of his employer's stock for $29 per share when the market price was $65 per share. This year, Mr. Delgado sold the stock for $80 per share. Which of the following statements is false?

A) If the option was an ISO, Mr. Delgado recognized a $51,000 gain on sale.
B) If the option was nonqualified, Mr. Delgado recognized a $15,000 gain on sale.
C) If the option was an ISO, Mr. Delgado has a $36,000 AMT preference item this year.
D) None of these choices are false.

Question 62

On June 30, 2016, Kelso Inc., a calendar year corporation, issued 2,000 shares of its publicly traded stock as compensation to its employee, Nick Penn. On date of issuance, the stock's fair market value was $13,500. Under the terms of his employment contract, Mr. Penn couldn't dispose of the stock before February 1, 2020, and if he terminated his employment with Kelso before that date, he had to forfeit the stock back to Kelso. On February 1, 2020, the fair market value of the 2,000 shares was $20,000. Which of the following statements is true?

A) If Mr. Penn elected to recognize income with respect to the restricted stock in 2016, Kelso was allowed to deduct $13,500 as employee compensation in 2016.
B) Kelso was allowed to deduct $13,500 as employee compensation in 2016.
C) Kelso is allowed to deduct $20,000 as employee compensation in 2020.
D) None of these choices aretrue.

Question 63

Six years ago, HOPCO granted Mr. Sing a nonqualified option to purchase 1,000 shares of HOPCO stock at $55 per share. On date of grant, the market price was $50 per share. This year, Mr. Sing exercised the option when the market price was $64 per share. How much ordinary income does Mr. Sing recognize because of the exercise?

A) $0
B) $5,000
C) $9,000
D) $14,000

Question 64

An employee receives $110,000 of group term life insurance coverage per year. The cost of this coverage to his employer is $90. The cost based on the IRS's uniform premium table is $1.08 per year per $1,000 of coverage. What amount is taxable to the employee?

A) $64.80
B) $54.00
C) $90.00
D) $118.80

Question 65

On June 30, 2016, Gruen Inc. issued 2,000 shares of its publicly traded stock as compensation to its employee, Stu Barnes. On date of issuance, the stock's fair market value was $13,500. Under the terms of his employment contract, Mr. Barnes couldn't dispose of the stock before January 1, 2020, and if he terminated his employment with Gruen before that date, he had to forfeit the stock back to Gruen. Mr. Barnes made no election with respect to the restricted stock in 2016. On January 1, 2020, Mr. Barnes, who was still a Gruen employee, sold all 2,000 shares for $47,500. What are the 2020 tax consequences to Mr. Barnes?

A) He recognizes $47,500 ordinary income and zero capital gain on sale of the stock.
B) He recognizes zero ordinary income and $47,500 capital gain on sale of the stock.
C) He recognizes zero ordinary income and $13,500 capital gain on sale of the stock.
D) He recognizes $34,000 ordinary income and $13,500 capital gain in sale of the stock.

Question 66

This year, Nilo Inc. granted nonqualified stock options to 230 employees. For financial statement purposes, Nilo recorded a $179,200 expense for the estimated value of the options. As a result of this transaction, Nilo has a:

A) Temporary favorable book/tax difference
B) Temporary unfavorable book/tax difference
C) Permanent favorable book/tax difference
D) Permanent unfavorable book/tax difference

Question 67

Four years ago, Acnex Inc. granted Ms. Cardena an incentive stock option (ISO) to purchase 1,000 shares of Acnex stock at $44 per share. On date of grant, the market price was $42 per share. This year, Ms. Cardena exercised the ISO when the market price was $75 per share. Which of the following statements is true?

A) Ms. Cardena recognizes $31,000 ordinary income, and Acnex is allowed a $31,000 deduction this year.
B) Ms. Cardena recognizes $31,000 ordinary income, but Acnex is allowed no deduction this year.
C) Ms. Cardena recognizes no ordinary income, and Acnex is allowed no deduction this year.
D) Ms. Cardena recognizes no ordinary income, but Acnex is allowed a $31,000 deduction this year.

Question 68

This year, Nilo Inc. granted incentive stock options (ISO) to 230 employees. For financial statement purposes, Nilo recorded a $179,200 expense for the estimated value of the ISOs. As a result of this transaction, Nilo has a:

A) Temporary favorable book/tax difference
B) Temporary unfavorable book/tax difference
C) Permanent favorable book/tax difference
D) Permanent unfavorable book/tax difference

Question 69

Six years ago, HOPCO granted Ms. Cardena a nonqualified option to purchase 1,000 shares of HOPCO stock at $12 per share. On date of grant, the market price was $10 per share. This year, Ms. Cardena exercised the option when the market price was $33 per share. Compute HOPCO's deduction resulting from the exercise.

A) $0
B) $12,000
C) $23,000
D) None of these choices are correct.

Question 70

Six years ago, Linus Corporation granted Pauline an incentive stock option (ISO) to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the ISO when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.

A) $135,000 gain
B) $10,000 loss
C) $35,000 loss
D) No gain or loss on sale

Question 71

Which of the following statements regarding fringe benefits is false?

A) The general rule is that an employee fringe benefit is taxable unless the benefit is specifically excluded from the employee's gross income.
B) Employers are not allowed to deduct the cost of nontaxable employee fringe benefits.
C) Nontaxable fringe benefits must be provided to employees on a nondiscriminatory basis.
D) None of these choices arefalse.

Question 72

Tony's marginal income tax rate is 24%, and he pays FICA tax on his entire salary (7.65%). Tony's employer offered him a choice between $5,000 additional salary or a nontaxable fringe benefit. Tony would have to pay $3,600 to purchase the benefit directly. Which of the following statements is true (answers rounded to the nearest whole dollar)?

A) The fringe benefit and the additional salary have the same after-tax value.
B) The fringe benefit is worth $183 more than the additional salary.
C) The additional salary is worth $1,600 more than the fringe benefit.
D) None of these choices are true.

Question 73

Six years ago, Linus Corporation granted Pauline a nonqualified option to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the option when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.

A) $135,000 gain
B) $10,000 loss
C) $35,000 loss
D) No gain or loss on sale

Question 74

Six years ago, HOPCO granted Mrs. Sing an incentive stock option (ISO) to purchase 1,000 shares of HOPCO stock for $55 per share. On date of grant, the market price was $50 per share. This year, Mrs. Sing exercised the ISO when the market price was $64 per share. How much ordinary income does she recognize because of the exercise?

A) $0
B) $5,000
C) $9,000
D) $14,000

Question 75

On March 1, 2016, Bema Inc. issued 600 shares of its publicly traded stock as compensation to its employee, Ms. McPhee. On date of issuance, the stock's fair market value was $12,000. Under the terms of her employment contract, Ms. McPhee couldn't dispose of the stock before July 1, 2020, and if she terminated her employment with Bema before that date, she had to forfeit the stock back to Bema. Ms. McPhee made a timely election in 2016 to accelerate income recognition with respect to the 600 shares of restricted stock. On July 1, 2020, Ms. McPhee, who was still employed by Bema, sold all 600 shares for $26,000. What are the 2020 tax consequences to Ms. McPhee?

A) She recognizes $26,000 ordinary income and zero capital gain on sale of the stock.
B) She recognizes zero ordinary income and $14,000 capital gain on sale of the stock.
C) She recognizes zero ordinary income and $26,000 capital gain on sale of the stock.
D) She recognizes $12,000 ordinary income and $14,000 capital gain in sale of the stock.

Question 76

Eight years ago, Acnex Inc. granted Ms. Cardena a nonqualified option to purchase 1,000 shares of Acnex stock at $44 per share. On date of grant, the market price was $42 per share. This year, Ms. Cardena exercised the option when the market price was $75 per share. Which of the following statements is true?

A) Ms. Cardena recognizes $31,000 ordinary income, and Acnex is allowed a $31,000 deduction this year.
B) Ms. Cardena recognizes $31,000 ordinary income, and Acnex is allowed a $44,000 deduction this year.
C) Ms. Cardena recognizes $33,000 ordinary income, and Acnex is allowed a $33,000 deduction this year.
D) Ms. Cardena recognizes $33,000 ordinary income, and Acnex is allowed a $44,000 deduction this year.

Question 77

Harold Biggs is provided with $200,000 coverage under his employer's group-term life insurance plan. Which of the following statements is true?

A) The value of the cost of $50,000 coverage is included in Harold's gross income.
B) The value of the cost of $150,000 coverage is included in Harold's gross income.
C) The value of the cost of $200,000 coverage is included in Harold's gross income.
D) Harold's life insurance coverage is a nontaxable fringe benefit.

Question 78

Mr. Wang's corporate employer transferred him from its Seattle office to its San Jose office. Mr. Wang incurred $18,000 of moving expenses to relocate his household to San Jose. Which of the following statements is true?

A) If his employer paid him an $18,000 moving allowance, Mr. Wang must include $18,000 in gross income.
B) If his employer paid him a $12,000 moving allowance, Mr. Wang is allowed a $6,000 itemized deduction for moving expenses.
C) If his employer paid him a $12,000 moving allowance, Mr. Wang is allowed a $6,000 above-the line deduction.
D) Regardless of the amount of any moving allowance paid by his employer, Mr. Wang is allowed an $18,000 itemized deduction for unreimbursed moving expenses.

Question 79

This year, Jenko Inc., a calendar year taxpayer, issued 1,000 shares of its publicly traded stock as a bonus to its employee, Mrs. Leder. On the date of issuance, the stock's fair market value was $25,000, and Mrs. Leder's ownership rights in the stock were unrestricted. Which of the following statements is true?

A) Mrs. Leder doesn't recognize income on receipt of the stock, and her tax basis in the stock is zero.
B) Mrs. Leder doesn't recognize income on receipt of the stock, and her tax basis in the stock is $25,000.
C) Mrs. Leder recognizes $25,000 of ordinary income on receipt of the stock, and her tax basis in the stock is $25,000.
D) None of these choices aretrue.

Question 80

Mr. Sherman incurred $7,000 of employment-related business expenses. Which of the following statements is true?

A) If his employer reimbursed him for these expenses, Mr. Sherman must include the reimbursement in gross income.
B) If his employer reimbursed him for $3,000 of the expenses, Mr. Sherman is allowed a $4,000 above-the-line deduction.
C) If his employer reimbursed him for $3,000 of the expenses, Mr. Sherman is allowed a $4,000 itemized deduction.
D) If his employer reimbursed him for $3,000 of the expenses, Mr. Sherman has a $4,000 nondeductible expense.