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Exam 15: Compensation and Retirement Planning

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Question 31

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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 the above.

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Question 32

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Which of the following is not a benefit of nonqualified deferred compensation plans?

A) Nonqualified plans may discriminate in favor of highly compensated executives.
B) There is no limit on the amount of nonqualified deferred compensation that can be provided to an employee.
C) Nonqualified deferred compensation plans are less risky for participating employees than qualified retirement plans.
D) Employers do not have to expend cash to fund a nonqualified plan.

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Question 33

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In 2019,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 3,2020.Dargo can deduct the bonus in 2019.

Lars withdrew $20,000 from a retirement account and used the money to buy a new car.Assuming that his marginal rate on ordinary income is 32%,compute the tax cost (and premature withdrawal penalty,if applicable)of the withdrawal in each of the following cases. a.Lars is 40 years old.He withdrew the money from a personal savings account. b.Lars is 40 years old.He withdrew the money from his employer-sponsored qualified plan after resigning from his job. c.Lars is 65 years old.He withdrew the money from a Roth IRA that he opened 16 years ago.

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

Unreimbursed employment-related business expenses are an itemized deduction.

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?

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.

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

Mr.Paul,age 73 and single,earned a $150,000 salary (AGI) as a university professor.He no longer participates in the university's qualified retirement plan.Which of the following is true?

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 Nasdaq for $19 per share.For financial statement purposes,Haven recorded $16,500 compensation expense for the estimated value of the option.Five years after Haven granted the option to Olivia,she exercised it on a day when Haven stock was selling for $27 per share. a.How much income must Olivia recognize in the year of exercise? b.What is Haven's tax deduction in the year of exercise? c.What is the effect of the exercise on Haven's book income and deferred taxes?

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

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 2,2020,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?

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.

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

In 2019,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.

Mr.and Mrs.Lawry,both age 60,each make the maximum contribution to their traditional IRAs.Mr.Lawry is an active participant in a section 401(k) plan,but Mrs.Lawry is not an active participant in any other qualified plan.If their joint AGI before any IRA deduction is $144,900,compute their AGI.

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.

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

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 70½.