Chapter 12 Compensation

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1. [LO3] {Tax Research} Sharmilla works for Shasta Lumber, a local lumber supplier. The company annually provides each employee with a Shasta Lumber shirt so that employees look branded and advertise for the business while wearing the shirts. Are Shasta’s employees required to include the value of the shirts in income?

§132(a)(4) excludes de minimis fringe benefits from taxable income. However, §132(e) defines fringe benefits “any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable.” The Treasury regulations under§132(§1.132-1) give specific examples which suggest that a shirt with a company logo may be excluded from gross income. However, the authority doesn’t explicitly mention the benefit received by Sharmilla. As a practical matter, most employers provide similar types of benefits and exclude the amount from employees’ income.

2. [LO3] {Tax Research} LaMont works for a company in downtown Chicago. The firm encourages employees to use public transportation (to save the environment) by providing them with transit passes at a cost of $255 per month.

a. If LaMont receives one pass (worth $255) each month, how much of this benefit must he include in his taxable income each year?

b. If the company provides each employee with $255 per month in parking benefits, how much of the parking benefit must LaMont include in his taxable income each year?

a) Under §132(f)(5)(A), an employer may exclude transit passes as a qualified transportation fringe benefits. The amounts described in the Code are not indexed, but the IRS annually provides the indexed amounts in a Revenue Procedure. For 2014, the amount is $130 for qualified transportation fringe as described in Rev. Proc.2013-15. LaMont must include $1,500 per year into taxable income ($125($255 of benefits less $130 exclusion) per month into income).

b) Under §132(f)(5)(C), an employer may exclude qualified parking as a qualified transportation fringe benefits. The amounts described in the Code are not indexed, but the IRS annually provides the indexed amounts in a Revenue Procedure. For 2014, the amount is $250 for qualified parking as described in Rev. Proc.2013-15. LaMont must include $60 per year into taxable income ($5($255 of benefits less $250 exclusion) per month into income).

3. [LO3] Jasmine works in Washington, D.C. She accepts a new position with her current firm in Los Angeles. Her employer provides the following moving benefits:

· Temporary housing for one month—$3,000

· Transportation for her household goods—$4,500

· Flight and hotel for a house-hunting trip—$1,750

· Flights to Los Angeles for her and her family—$2,000

What amount of these benefits must Jasmine include in her gross income?

Employers can exclude qualified moving expense reimbursements from income under §132(g). However, the amounts must be deductible under the moving expense rules contained in §217. Amounts that can be excluded include a reasonable amount for moving household belongings and the cost of traveling to the new residence. Therefore, Jasmine can exclude $4,500 for the transportation of the household goods and $2,000 for flights to Los Angeles. Jasmine must include the $3,000 of temporary housing and $1,750 for house hunting into her taxable income.

4. [LO 3] Jarvie loves to bike. In fact, he has always turned down better paying jobs to work in bicycle shops where he gets an employee discount. At Jarvie’s current shop, Bad Dog Cycles, each employee is allowed to purchase four bicycles a year at a discount. Bad Dog has an average gross profit percentage on bicycles of 25 percent. During the current year, Jarvie bought the following bikes:

Description

Retail Price

Cost

Employee Price

Specialized road bike

$3,200

$2,000

$2,240

Rocky Mountain mountain bike

$3,800

$3,200

$3,040

Trek road bike

$2,700

$2,000

$1,890

Yeti mountain bike

$3,500

$2,500

$2,800

a. What amount is Jarvie required to include in taxable income from these purchases?

b. What amount of deductions is Bad Dog allowed to claim from these transactions?

a) Under §132(a)(2), an employer may exclude from an employee’s income discounts that do not exceed the employer’s cost of goods it provides in the ordinary course of its business. Therefore, Jarvie must include $295 into taxable income:

Description

Retail price less average gross profit percentage

Employee Price

Income

Specialized road bike

$2,400

$2,240

$160

Rocky Mountain mountain bike

$2,850

$3,040

$0

Trek road bike

$2,025

$1,890

$135

Yeti mountain bike

$2,625

$2,800

$0

Income

$295

b) Bad Dog is not allowed a deduction for the employee discounts it provides its employees. It may include the $9,700 ($2,000 + $3,200 + $2,000 +$2,500) for the cost of the goods sold to employees in its cost of goods sold.

5. [LO 1, 3] Matt works for Fresh Corporation. Fresh offers a cafeteria plan that allows each employee to receive $15,000 worth of benefits each year. The menu of benefits is as follows:

Benefit

Cost

Health insurance--single

$5,000

Health insurance--with spouse

$8,000

Health insurance--with spouse and dependents

$11,000

Dental and vision

$1,500

Dependent care--any specified amount up to $5,000

Variable

Adoption benefits--any specified amount up to $5,000

Variable

Educational benefits--any specified amount (no limit)

Variable

401(k)--any specified amount up to $10,000

Variable

Cash-- any specified amount up to $15,000 plan benefit

Variable

For each of the following independent circumstances, determine the amount of income Matt must recognize and the amount of deduction Fresh may claim (ignore FICA taxes):

a. Matt selects the single health insurance and places $10,000 in his 401(k).

b. Matt selects the single health insurance, is reimbursed $5,000 for MBA tuition, and takes the remainder in cash.

c. Matt selects the single health insurance and is reimbursed for MBA tuition of $10,000.

d. Matt gets married and selects the health insurance with his spouse and takes the rest in cash to help pay for the wedding.

e. Matt elects to take all cash.

a. Matt must recognize $0, because each of the benefits is a nontaxable fringe benefit.

b. Matt must recognize $5,000, because he receives cash and two nontaxable fringe benefits. Educational assistance benefits have a maximum nontaxable amount of $5,250.

c. Matt must recognize $4,750 of taxable income because his MBA tuition exceeded the maximum nontaxable amount of $5,250.

d. Matt must recognize $7,000 of taxable income for the cash received. The $8,000 of health insurance is a nontaxable fringe benefit.

e. Matt must recognize $15,000 of taxable income for the cash received.

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