Question 1

One of the benefits of an incentive stock option is that the employee can sell the option at any time.

Accepted Answer

One of the restrictions of an incentive stock option is that it cannot be sold by the employee until a certain period of time has passed, known as the "holding period." This holding period is typically two years from the date the option was granted and one year from the date of exercise. Therefore, the statement is false.

Question 2

Tim has a 25% interest in Hill and Associates,a partnership.Tim is eligible for coverage as an employee under the firm's qualified pension plan.

Accepted Answer

As a partner with a 25% interest in the partnership, Tim is considered an owner, not an employee, and therefore his eligibility for coverage under the firm's qualified pension plan would be based on his status as a partner, not as an employee.

Question 3

The tax advantage of a Roth IRA is that although the contributions are not deductible,the distributions of contribution and income are tax-free.

Accepted Answer

This is correct as per the IRS rules for Roth IRA.

Question 4

IRS scrutiny of reasonable compensation usually deals with excess compensation paid to the shareholders of closely held corporations and unreasonably low salaries to shareholders of an S corporation.

Accepted Answer

The statement is correct that IRS scrutiny of reasonable compensation usually deals with excess compensation paid to the shareholders of closely held corporations and unreasonably low salaries to shareholders of an S corporation.

Question 5

All of the following are requirements of a qualified pension plan except:
A)The plan must be in writing.
B)The plan cannot discriminate in favor of highly paid employees.
C)The plan must be for the exclusive benefit of the employees or their beneficiaries.
D)The plan must cover all employees who have worked for the company more than 18 months.
E)The plan must limit the amount of contributions that can be made to the plan and/or the benefits received from the plan.

Accepted Answer

The requirement that a qualified pension plan must cover all employees who have worked for the company more than 18 months is not accurate. This requirement may vary based on the terms of the specific plan. However, the other requirements listed (the plan must be in writing, cannot discriminate in favor of highly paid employees, must be for the exclusive benefit of employees or their beneficiaries, and must limit contributions and/or benefits) are true requirements for a qualified pension plan.

Question 6

Ester is employed by Montgomery Enterprises and will retire at the end of the current year after 22 years of service.Under the company's defined benefit plan,she can retire at 80% of the average of her three highest consecutive years' salary.Her average salary over these three years is $80,000.What is the maximum amount Ester can receive from Montgomery's pension plan?
A)$35,000
B)$64,000
C)$80,000
D)$100,000
E)$125,000

Accepted Answer

Ester's retirement payout will be 80% of her average salary over the three highest consecutive years. We are told that her average salary for those three years is $80,000. Therefore, her retirement payout will be:

0.8 * $80,000 = $64,000

This is the maximum amount Ester can receive from Montgomery's pension plan, so the correct answer is (B).

Question 7

A nonqualified stock option is a right to buy a share of stock at a fixed price within a specified time period.If the employee recognizes income when the stock option is received then the employer can take a deduction of the same amount.

Accepted Answer

The answer of A nonqualified stock option is a right...

Question 8

The Data Company employs John and Jesse.John has worked for Data for 4 years,whereas Jesse has worked for the company for only 18 months.Both are 27 years old.
I.John must be eligible to participate in Data's qualified pension plan.
II.Jesse must be eligible to participate in Data's qualified pension plan.
​
A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

John has worked for Data for more than 3 years, making him eligible to participate in the company's qualified pension plan. However, Jesse has only worked for the company for 18 months, which is not enough time to be eligible for the plan. Therefore, statement I is correct but statement II is not.

Question 9

Savings incentive match plan for employees (SIMPLE)were created to encourage small businesses to establish retirement plans for their employees.

Accepted Answer

SIMPLE plans were specifically designed for small businesses (typically those with 100 or fewer employees) as a way to encourage them to establish retirement plans for their employees. It is a tax-deferred retirement plan option that simplifies the administrative and financial aspects for employers.

Question 10

A Keogh plan is administratively more convenient and economical than a simplified employee pension plan (SEP).

Accepted Answer

A simplified employee pension plan (SEP) generally has lower administrative fees and easier record-keeping requirements compared to a Keogh plan, which may involve more paperwork and additional costs for professional services. Therefore, a SEP is typically considered more convenient and economical for small businesses or self-employed individuals with relatively low incomes or fewer employees.

Question 11

Unmarried taxpayers who are not active participants in a pension plan are allowed to deduct their entire contribution to an IRA regardless of the amount of their adjusted gross income.

Accepted Answer

This statement is true according to IRS rules. Unmarried taxpayers who are not active participants in a pension plan can deduct the full amount of their contribution to an IRA, regardless of their income level. However, if they are an active participant in a pension plan, the deductibility of their IRA contribution may be limited or phased out based on their income.

Question 12

Thelma can get the 10% penalty on the early withdrawal from her IRA waived if the money is used to pay her son's college tuition.

Accepted Answer

This is true under certain circumstances. If Thelma meets the criteria for an exception to the early withdrawal penalty, such as using the funds to pay for qualified higher education expenses for herself, her spouse, or her child, then the penalty can be waived. However, it is important to note that any withdrawals from an IRA are subject to income taxes, and using the funds for other expenses may result in additional penalties and fees.

Question 13

Any structure over 100 years old is eligible for the rehabilitation tax credit.

Accepted Answer

The structure must be at least 40 years old and must be certified as a historic structure by the National Park Service to be eligible for the rehabilitation tax credit.

Question 14

Under a nonqualified pension plan
I.The yearly earnings on the pension plan assets are taxable income to the employee.
II.An employer's contribution is taxable income to the employee at the time of the contribution.
​
A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

The answer of Under a nonqualified pension plan
I.The yearly earnings...

Question 15

A taxpayer must begin withdrawals from any type of retirement plan (except a Roth IRA)no later than April 1 of the tax year after the taxpayer reaches age 70¹/₂ or,if later,the year they retire.

Accepted Answer

This is true according to IRS rules on Required Minimum Distributions (RMDs) from retirement accounts.

Question 16

The employee's contribution to a nonqualified pension plan cannot be deferred,and the employer is not allowed a tax deduction for the contribution even though the employee includes the contribution in their income.

Accepted Answer

Employee contributions to a nonqualified pension plan can indeed be deferred, and the employer's tax deduction for contributions is typically deferred until the employee recognizes the income. This means the employer does not get an immediate tax deduction at the time of contribution if the plan defers the taxation of the income for the employee.

Question 17

The adjustment for three-fourths of the excess adjusted current earnings (ACE)over AMTI before the ACE adjustment applies only to corporations.

Accepted Answer

The adjustment for three-fourths of the excess ACE over AMTI before the ACE adjustment applies only to corporations, not individuals or other types of entities.

Question 18

Under a qualified pension plan
I.The yearly earnings on the pension plan assets are taxable income to the employee.
II.An employer's contribution is not taxable income to the employee at the time of the contribution.
​
A)Only I is correct.
B)Only II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Statement I is incorrect because earnings on the pension plan assets are not taxable income to the employee until they are withdrawn as distributions. Statement II is correct because employer contributions to a qualified pension plan are not taxable income to the employee at the time of contribution. However, they will be taxable when the employee receives distributions from the plan in retirement.

Question 19

A Keogh plan must be established as a defined contribution plan,and the rules are similar to those of a qualified pension plan.

Accepted Answer

The answer of A Keogh plan must be established as...

Question 20

Peter opened his IRA in 2003 and withdrew money to purchase a house in 2017.Since the distribution qualified as a "qualified first-time-homebuyer expenses," it is not subject to the 10% early withdrawal penalty.

Accepted Answer

According to IRS rules, a "qualified first-time-homebuyer expenses" distribution from an IRA is not subject to the 10% early withdrawal penalty. To qualify, the distribution must be used to pay the acquisition costs of a principal residence within 120 days of the distribution. As Peter withdrew money to purchase a house in 2017 and satisfied the conditions mentioned, the answer is true.

Quiz 15: Choice of Business Entity -- Other Considerations