On January 1, Sandi borrows $40,000 from G&H Accounting firm, her employer, to pay-off charge accounts and other personal loans. Sandi must repay the $40,000 loan at the end of 5 years. Because Sandi has been loyal to her job, G&H is not charging Sandi interest on the $40,000 loan. The applicable federal interest rate is 6%. If Sandi has total net investment income for the current year of $200:
I.Sandi has compensation income of $2,400.
II.Sandi has a nontaxable gift from her employer of $2,400.
III.G&H is allowed a deduction for $2,400 of compensation paid to SandI.
IV.There are no tax effects because Sandi's net investment income is less than $1,000.

A)Only statement I is correct.
B)Only statement II is correct.
C)Only statements I and III are correct.
D)Only statements II and IV are correct.
E)Only statements II and III are correct.

Question

On January 1, Sandi borrows $40,000 from G&H Accounting firm, her employer, to pay-off charge accounts and other personal loans. Sandi must repay the $40,000 loan at the end of 5 years. Because Sandi has been loyal to her job, G&H is not charging Sandi interest on the $40,000 loan. The applicable federal interest rate is 6%. If Sandi has total net investment income for the current year of $200:
I.Sandi has compensation income of $2,400.
II.Sandi has a nontaxable gift from her employer of $2,400.
III.G&H is allowed a deduction for $2,400 of compensation paid to SandI.
IV.There are no tax effects because Sandi's net investment income is less than $1,000.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Only statements I and III are correct.
D)Only statements II and IV are correct.
E)Only statements II and III are correct.

Quizplus · Accepted Answer

Statement I is correct because Sandi has compensation income from her job, which is unrelated to the loan from G&H.

Statement II is incorrect because there is no mention of Sandi receiving a nontaxable gift from her employer.

Statement III is correct because G&H can take a deduction for the compensation paid to Sandi as it is a business expense.

Statement IV is incorrect because there are tax effects to consider. Sandi must report the $200 net investment income on her tax return and may owe taxes on it depending on her overall income and tax situation.

On January 1, Sandi Borrows $40,000 from G&H Accounting Firm