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

When an employer lends an employee money interest-free or at a rate lower than the federal interest rate, the employee is considered to have received imputed compensation income. In this case, Joyce received a $50,000 interest-free loan, so she must recognize $1,500 of imputed compensation income ($50,000 x 3%). Option A is incorrect because Joyce did not pay any interest, so she has no taxable interest income. Option B is incorrect because the employer did not pay any interest, so there is no deductible interest expense. Option D is incorrect because a loan is not a dividend.

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