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

Question

Quizplus · Accepted Answer

Imputed compensation income is the correct answer. Whenever an employee receives an interest-free or below-market loan from their employer, the difference between the interest rate charged by the employer and the federal interest rate must be recognized as income by the employee. In this case, the federal interest rate is 3 percent and Joyce is receiving an interest-free loan, so she must recognize $1,500 ($50,000 x 3%) of imputed compensation income. Option A is incorrect because Joyce is not recognizing taxable interest income since the loan is interest-free. Option B is incorrect because the employer is not recognizing any deductible interest expense since no interest is being charged. Option D is incorrect because it is not a dividend income situation.

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