Chapter 12 Compensation

1.
[LO 1] Nicole
and Braxton are each 50 percent shareholders of NB Corporation. Nicole is also an employee of the
corporation. NB is a calendar-year
taxpayer and uses the accrual method of accounting. The corporation pays its employees monthly on
the first day of the month after the salary is earned by the employees. What issues must NB consider with respect to
the deductibility of the wages it pays to Nicole if Nicole is Braxton’s
sister? What issues arise if Nicole and
Braxton are unrelated?
2.
[LO 1] Holding all else equal, does an employer with a
higher marginal tax rate or lower marginal tax rate have a lower after-tax cost
of paying a particular employee’s salary? Explain.
3.
[LO 1] What are
nontax reasons why a corporation may choose to cap its executives’ salaries at
$1 million?
4.
[LO 1] What are
tax reasons why a corporation may choose to cap its executives’ salaries at $1
million?
5.
[LO 1] Lea is a
highly paid executive with MCC, Inc., a publicly traded corporation. What are the circumstances under which MCC
will be able to deduct more than $1 million of compensation paid to Lea during
the year?
6.
[LO 2] From an employee
perspective, how are incentive stock options treated differently than
nonqualified stock options for tax purposes?
In general, for a given number of options, which type of stock option
should employees prefer?
7.
[LO 2] From an employer perspective, how are incentive
stock options treated differently than nonqualified stock options for tax
purposes? In general, for a given number
of options, which type of stock option should employers prefer?
8.
[LO 2] Why do
employers use stock options in addition to salary to compensate their
employees? For employers, are stock
options treated more favorably than salary for tax purposes? Explain.

9.
[LO 2] What is a “disqualifying disposition” of
incentive stock options, and how does it affect employees who have exercised
incentive stock options?

10. [LO
2] Compare and contrast how employers record book and tax expense for stock
options.
11. [LO 2] How is the tax treatment of restricted
stock different from that of nonqualified options? How is it similar?