Exam 15: Compensation and Retirement Planning

Lansing Corporation, a publicly held company with a 35% marginal tax rate, paid its CEO an annual salary of $2.3 million. Ignoring payroll taxes, calculate the after-tax cost of this payment.

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

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?

Mr. and Mrs. Owens moved from San Francisco, California, to Richmond, Virginia, so that Mrs. Owens could accept employment with Mega Corporation. As part of her employment contract, Mrs. Owens received a $10,000 moving allowance. What is the effect of this $10,000 cash receipt on the couple's AGI assuming that: a. Their deductible moving expenses totaled $8,000? b. Their deductible moving expenses totaled $11,000?

The classification of a worker as an employee or an independent contractor determines how much payroll tax a company must pay.

This year, Haven Corporation granted a nonqualified stock option to Olivia to buy 5,000 shares of Haven stock for $20 for five years. At date of grant, Haven stock was selling on the NASDAQ for $19 per share. For financial statement purposes, Haven recorded $16,500 compensation expense for the estimated value of the option. a. How much income must Olivia recognize as a result of the grant of the option? b. Can Haven deduct the $16,500 compensation expense on this year's tax return? c. Assuming a 35% tax rate, compute Haven's deferred tax asset or deferred tax liability (identify which) resulting from the $16,500 compensation expense.

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

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 salary and a $1.7 million bonus because Mr. Hazel met a performance goal established by outside members of the board of directors. The corporation is allowed to deduct the entire amount of Mr. Hazel's compensation.

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

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?

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.

In 2015, Amanda earned $70,000 self-employment income. She was allowed a $4,945 above-the line deduction for her SE tax. Compute Amanda's maximum contribution to her profit-sharing Keogh plan.

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:

Any individual taxpayer who earns any amount of compensation or self-employment income can contribute $5,500 to a traditional IRA.

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

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

Lana, an employee of Compton University, paid $1,500 for professional journal subscriptions and $1,000 of membership dues to academic organizations. These unreimbursed employment-related expenses are Lana's only miscellaneous itemized deduction. Which of the following statements is false?

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.

Mr. Thano, age 47, withdrew $22,000 from his employer-sponsored qualified retirement plan to pay for his daughter's wedding. Compute the tax cost of the withdrawal if Mr. Thano has a 28% marginal tax rate on ordinary income.

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