3. Bill cashed in an old life insurance policy for $ 6,000. Bill had paid premiu
ID: 2342142 • Letter: 3
Question
3. Bill cashed in an old life insurance policy for $ 6,000. Bill had paid premiums over the years totaling $ 4,900. How much (if any) is included as gross income to Bill on the $ 6,000 he received from the insurance company? 4. Sam, age 33 is employees by Good Corporation. Good corporation provides Sam with free group term life insurance in the amount of $ 300,000. Does Sam recognize any gross income on this fringe benefit? so, how much? If 5. Billy works for Best Buy. Best Buy offers employee discounts to its employees. Calculate the amount (IF ANY), that would be included in Bill's gross income in each of the following situations: a. Bill receives a 40% discount on new Flat Screen TV's. The normal selling price to customers is $ 2,000 and TV cost to Best is $ 1,000. b. Same as (a) except the TV cost Best Buy $ 1,400. C. Best Buy offers a "service package, including hook-up and at home troubleshooting for 1 year for $ 200. It offers Bill a 30% discount (this service costs Best Buy $ 30.)Explanation / Answer
3. Calculation of amount to be included in Gross Income:
We need to add up all premiums paid over years and substract amount of devidend received if any. The resulting number will be bill's basis or bill's investment in the policy. Further after subtracting basis value from surrender value bill will get the amount to be included in gross income
Bill's investment in the policy/basis = Premium paid over years LESS Dividends, if any
= $4,900 LESS nil
Basis = $4,900
Amount to be included in Gross Income = Cash surrender value LESS Basis
= $6,000 LESS $4,900
Amount to be included in Gross Income = $1,100
4. No, Sam should not recognise any fringe benefit in his income as FBT on group life insurance policy is specifically tax exempt.
5. Section 132(a)(2) allows employers to provide a employee discount that is excludable from an employee's taxable income. A employee discount is a discount with respect to a property or services that:
5. a. For sales of products, your average gross profit percentage for the prior year times the price you charge clients for the same products.
Calculation of Gross profit
TV sold to outside customers = $ 2,000
Less: Cost to Best = $ 1,000
Profit = $ 1,000
Gross Profit % = 50% (Profit/sale to customer) ($1000/$2000)
Maximum discount best can give to Bill is 50%. Since Best has given discount of only 40% so NO AMOUNT WILL BE INCLUDED IN BILL'S GROSS INCOME.
5. b.
V sold to outside customers = $ 2,000
Less: Cost to Best = $ 1,400
Profit = $ 600
Gross Profit % = 30% (Profit/sale to customer) ($600/$2000)
Since Best is giving discount of 40% which is more than 30% then 10% is to be included in Bill gross income i.e. $ 200
5.c. Maximum discount when it comes to services is 20%. Here, best is offering 30% discount. Therefore, 10% of the amount charged to other customers will be included in the gross income of bill i.e. $ 20.
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