Compute the net present value of the after tax cash flow

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1. Deferred Compensation
Ricardo is a professional football player. In negotiating his contract for the upcoming season, Ricardo is given two options. He can receive (1) 12 monthly checks of $325,000 with no deferred payments or (2) $250,000 monthly with the $900,000 balance placed in escrow and payable to him (with interest) after he retires from professional sports. What are the tax implications of these two alternatives?

2. Excessive Compensation
Gaudy Gift Gallery Corporation (owned 100 percent by Barbara) operates a gift shop. Barbara employs her daughter, Jenny, after school and on weekends. Other employees with similar responsibilities are paid $7 per hour while Jenny is paid $15 per hour. Jenny earned $15,000 in the current year from the store. Is Jenny's salary fully deductible by the corporation? Explain.

3. Employee Discount vs. Bargain Purchase
What is the difference between a qualified employee discount and a bargain purchase by an employee?

4. De Minimis Benefits
In which of the following cases should the employees report the benefit received as gross income?
a. The employer provides an annual picnic for employees and their families to celebrate Independence Day.
b. Employees can use the company photocopier for small amounts of personal copying as long as the privilege is not abused.
c. Employees receive a free ticket to watch the Dolphins play the Raiders.
d. Each employee receives a $50 check on his or her birthday.

5. Stock Options
What is the difference between an NQSO and an ISO?

6. Qualified Retirement Plan
What are the advantages of a qualified retirement plan?

7. Individual Retirement Accounts
Identify the type of IRA (Roth or traditional) that would be best for a taxpayer in each of the following circumstances:
a. Sharon believes she will be in a higher tax bracket when she withdraws the money in retirement.
b. Ken believes he will be in the same or a lower tax bracket in retirement.
c. Susan wants to use her retirement savings for building her estate to pass on to her children.

8. Fringe Benefits for Self-Employed vs. Employees
James and Dean plan to start a new business and have not yet decided whether to organize as a partnership, an S corporation, or a C corporation. They are interested in taking advantage of any tax-free fringe benefits that may be available to them. Discuss the advantages and disadvantages from a fringe-benefit perspective of each form of business entity.Crunch the Numbers

9. Excessive Compensation
Charlie, who is in the 35 percent marginal tax bracket, is the president and sole owner of Charlie Corporation (a C corporation in the 34 percent tax bracket). His current salary is $700,000 per year. What are the income and FICA tax consequences if the IRS determines that $200,000 of his salary is unreasonable compensation?

10. Timing of Compensation
Amy, a cash-basis taxpayer, received a salary of $100,000 during year 1, year 2, and year 3. Amy also was awarded a bonus of $30,000 that was accrued by Amy's employer, Vargus Corporation (an accrual-basis, calendar-year C corporation), in December of year 1 but the bonus was not paid until March 31 of year 2. In December of year 2, Vargus accrued an additional $32,000 bonus that was paid to Amy in January of year 3.
a. How much income does Amy recognize in year 1, year 2, and year 3?
b. How much can Vargus Corporation take as a compensation deduction in year 1, year 2, and year 3?.

11. Group Term Life Insurance
Tom is 68 years old. His employer pays the premiums for group term life insurance coverage of $110,000. The cost of Tom's coverage to the company is $3,000.
a. If the plan providing this coverage is nondiscriminatory and Tom is not a key employee, how much gross income does Tom have?
b. How does your answer to (a) change if Tom is a key employee?
c. If the plan is discriminatory, but Tom is not a key employee, what is Tom's gross income?
d. How does your answer to (c) change if Tom is a key employee?

12. Fringe Benefits under Cafeteria Plan
Priscilla, an employee of Choice Corporation, receives an annual salary of $70,000. Choice has a cafeteria plan that allows all employees to choose an amount equal to 8 percent of their annual salary from a menu of nontaxable fringe benefits or to take cash. Priscilla selects $50,000 of group term life insurance that costs the company $900 and also selects health insurance that costs the company $2,000; she takes the remaining $2,700 in cash. How much compensation income does Priscilla recognize from Choice Corporation?

13. Flexible Spending Arrangement
Jennifer elects to reduce her salary by $3,500 so she can participate in her employer's flexible spending arrangement. Her salary reduction is allocated as follows: $2,400 for medical and dental expenses and $1,100 for child care expenses. During the year, Jennifer uses $2,000 of her salary reduction for medical and dental care and $1,000 for childcare assistance.
a. How much of the $3,500 set aside in the FSA is included in Jennifer's gross income?
b. How much of the $3,000 reimbursed from the FSA is included in Jennifer's gross income?
c. What happens to the remaining $500?

14 Lodging vs. Cash Allowance
Clark works all year at the front desk of the Dew Drop Inn and earns a salary of $30,000. He is offered the option of a $400-per-month living allowance or rent-free use of a room at the Dew Drop Inn. Clark chooses to live at the inn in a room that normally rents for $400 per month. How much gross income does Clark have from the Dew Drop Inn?

15. Employee Discount
Kevin is an employee of One Hour Dry Cleaners, Inc. All employees of One Hour are eligible for a 40 percent discount on their dry cleaning. During the year, Kevin paid $300 for cleaning that would normally have cost $500. Does Kevin have any taxable income as a result of this discount?

16. Tax-Free Fringe Benefits
Betsy receives a salary of $50,000 from her employer (a retail clothing store) and several fringe benefits. Her employer pays premiums of $300 for her $40,000 group term life insurance coverage and pays $2,400 for medical insurance premiums. Her employer provides dependent care facilities (where she places her young children while she is at work) valued at $4,500 per year. Her employer also allows employees to purchase clothing (the employer's inventory) at 50 percent off the retail sales price (which is 5 percent more than the employer's cost). During the year, Betsy purchases clothing with a retail value of $10,000 for $5,000. In addition to her salary, how much must Betsy include in gross income?

17. Moving Expense Qualification
Jill worked for a business in Denver. She took a new job with a different company in Colorado Springs, 90 miles away. Her commuting distance from her old home to her old employer in Denver was 15 miles. If she does not move to Colorado Springs, her commuting distance from her old home near Denver to her new place of employment in Colorado Springs would be 70 miles. She decides to move to Colorado Springs. The commuting distance from her new home in Colorado Springs to her new place of employment is 10 miles.
a. Which commuting distances are important in meeting the mileage test for deductibility of moving expenses?
b. By how many miles does Jill's commute exceed the minimum necessary to pass the test?

18. Moving Expense Deduction and Reimbursement
In January, Susan's employer transferred her from Chicago to Houston (where she continues to work for the remainder of the year). Her expenses are as follows:
Transportation for household goods $2,300
Airfare from Chicago to Houston 200
Pre-move house-hunting travel 700
Temporary living expenses in Houston 400
Apartment lease cancellation fee 1,200
Total moving expenses paid $4,800
a. If Susan is not reimbursed for any of these expenses, how much of her moving expenses can she deduct?
b. If Susan's employer reimburses her $3,600 for all of these moving expenses except for the lease cancellation fee, will she have any taxable income?

19. Restricted Stock
Luis received 400 shares of his employer's stock as a bonus. He must return the stock to the company if he leaves before the 5-year vesting period ends. The fair market value of the stock at the time it was issued was $20,000. After five years, the stock vests when it has a fair market value of $75,000. Two years after vesting, Luis sells the stock for $100,000. 

a. If Luis makes no election, how much income or gain does he recognize (1) when the stock is issued, (2) when the stock vests, and (3) when the stock is sold?

b. If Luis makes an election to accelerate the recognition of income, how much income or gain does he recognize (1) when the stock is issued, (2) when the stock vests, and (3) when the stock is sold?

c. If Luis makes an election to accelerate the recognition of income but he leaves the company after three years, is he eligible for a refund of taxes paid?

20. Nonqualified Stock Options
Five years ago, Cargo Corporation granted a nonqualified stock option to Mark to buy 3,000 shares of Cargo common stock at $10 per share exercisable for five years. At the date of the grant, Cargo stock was selling for $9 per share. This year, Mark exercises the option when the price is $50 per share.
a. How much income should Mark have recognized in the year the option was granted?
b. How much income does Mark recognize when he exercises the option?
c. What are the tax consequences for Cargo from the NQSO in the year of grant and in the year of exercise?

21. Incentive Stock Options
Three years ago, Netcom granted an ISO to Karen to buy 2,000 shares of Netcom stock at $6 per share exercisable for five years. At the date of the grant, Netcom stock was selling for $5 per share. This year, Karen exercises the ISO when the price is $30 per share.
a. How much income should Karen have recognized in the year the ISO was granted?
b. How much income does Karen recognize when she exercises the ISO?
c. What are the tax consequences for Netcom from the ISO in the year of grant and in the year of exercise?
d. What are the tax consequences to Karen and to Netcom if Karen sells all of the stock for $50 per share two years after exercising the options?

22. Stock Appreciation Rights
Four years ago, Handcock Corporation granted 300 SARs to Maria as a bonus. Handcock's stock was worth $20 a share on the date of grant. Maria exercises her SARs this year when the stock is worth $60 a share.
a. How much income should Maria have recognized in the year she received the SARs?
b. How much income does Maria recognize when she exercises the SARs?
c. If Maria is in the 35 percent marginal tax bracket, what is her after-tax cash flow from the exercise of the SARs?
d. Does Handcock Corporation get a tax deduction for the SARs and if yes, when and in what amount?

23. Employee Benefits
Larry, age 32, works for Horizon Corporation. His annual salary is $60,000. Horizon provides the following benefits to all employees:
• Group term life insurance (each employee is provided with $80,000 worth of coverage that costs Horizon $120 per employee)
• Medical insurance (the cost of Larry's policy is $2,100)
• Qualified pension plan (Horizon matches employee contributions up to $2,500. Larry contributes 7 percent of his salary to the plan.)
• Qualified award program (Larry received a watch Horizon purchased for $100 to recognize his 5 years of service with Horizon.)
How much income must Larry recognize and how much can Horizon Corporation deduct in the current year?

24. Individual Retirement Account
Nick, age 53, is single and has AGI of $58,000. He contributes $5,000 to his IRA in 2010.
a. How much can Nick deduct if he is not covered by an employer-sponsored qualified retirement plan?
b. How much can Nick deduct if he is covered by an employer-sponsored qualified retirement plan?

25. Roth IRA
Jennifer, age 35, is single and is an active participant in her employer's qualified retirement plan. Compute the maximum Roth IRA contribution that she can make in 2010 if:
a. Her adjusted gross income is $130,000.
b. Her adjusted gross income is $59,000.
c. Her adjusted gross income is $38,000 and she makes a $2,000 contribution to a traditional IRA.

Reference no: EM131129579

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