Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3%, which of the following is correct?

Question

Quizplus · Accepted Answer

Joyce would recognize $1,500 of imputed compensation income because she received an interest-free loan from her employer. The imputed compensation income is equal to the amount of interest that would have been paid on the loan if it had been a market rate loan. In this case, the market rate of interest is 3%, so Joyce would have had to pay $1,500 in interest on a $50,000 loan. Therefore, she is considered to have received $1,500 in compensation from her employer. Neither dividends nor interest expense are relevant in this scenario.

Joyce's Employer Loaned Her $50,000 This Year (Interest-Free) to Buy