tax

takeaways Chapter 12 Key takeaways

If you can do/understand the following then you should have a good grasp on Chapter 12

  • Compensation

    • Form W-2: employers provide employee with each year that tells them taxable compensation (salary, wages, taxable fringe benefits, etc), income taxes withheld, FICA taxes, etc.

    • After tax cost = deductible expenditure X (1-MTR)

    • Salary for CEO (covered employees) in excess of $1 million is nondeductible (after 2017)

  • Equity Based compensation

    • Know how to calculate bargain element: market value of shares minus cash price OR (FMV price per share minus exercise price per share) * number of shares

    • Know tax treatment for employee for NQOs and ISOs

      • NQOs: Bargain element is recognized as ordinary income on the exercise date

      • ISOs: Bargain element is deferred until stock is sold. It will be taxed as LTCG if employees hold ISOs for at least 2 years after grant date and holds stock from exercising at least one year after exercise date. If they do not meet the holding requirement then it is taxed as ordinary income.

    • Restricted stock awards: employees taxed on FMV of shares on date of restriction lapses (vesting date)

      • Election 83(b) accelerates income recognition from vesting date to grant date

  • Fringe benefits

    • Noncash benefits provide to employees

    • Some examples of taxable fringe benefits include below-market loans, gym membership, personal use of automobile

    • Know the general rules for nontaxable fringe benefits Exhibit 12-10 in Chapter 12

    • Group term life insurance

      • Coverage less than $50,000 nontaxable

      • If coverage is over $50,000 there are 4 steps to find taxable amount

    • Health and accident insurance, dental insurance, and vision insurance paid by employer is nontaxable to employee

    • Meals and lodging

      • Nontaxable if provided by employer on employer’s premises for the convenience of employer

      • Lodging has an additional requirement: the lodging must be a condition of employment

    • Educational assistance excluded up to $5,250

    • Dependent care excluded up to $5,000

    • Costs of services can be excluded if there is no-additional cost to employer (this includes no foregone revenue)

    • Employee discounts

      • Services up to 20% discount can be excluded

      • Products up to discount equal to employer’s average gross profit percentage can be excluded

    • Cafeteria plans           

      • If benefit chosen was already a nontaxable fringe benefit then employee does not need to include in gross income

      • Any cash received is taxable

    • Know how to compare 2 jobs with different benefits provided to determine after-tax income (Example 5 on Fringe benefits tab on Ch