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

According to IRS regulations, when an employer loans an employee money at an interest rate below the federal rate, the difference between the two rates is considered "imputed interest" or "imputed compensation income" and is taxable to the employee. In this case, since the federal interest rate was 3% and Joyce received an interest-free loan, the imputed interest amount would be $1,500 (3% of $50,000) and Joyce would need to recognize this as taxable compensation income. Neither A nor B is correct because there is no actual interest paid or received in this situation. D is incorrect because the loan is not related to dividends. Option E is also incorrect as it contradicts the IRS regulations on below-market loans.

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