Chapter 31
CASH COMPENSATION PLANNING
LEARNING OBJECTIVES:
A. Have a basic understanding of cash compensation planning
REVIEW:
This chapter covers cash compensation as an employee benefit. Advantages
and disadvantages of cash versus non-cash compensation are reviewed. The
reasonableness of compensation is discussed in the tax implications section,
along with factors in determining what is considered reasonable. This section
also covers the treatment of disallowed compensation, reimbursement
agreements, and the timing of income and deductions. Alternatives – essentially
non-cash compensation – are mentioned and there is a section with several
references for learning more. Complex employment agreements are mentioned
in the section on how the plan is set up. The chapter ends with a brief question
and answer section.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Tax Implications
1. Reasonableness of Compensation
2. Factors in Determining Reasonable Compensation
3. Treatment of Disallowed Compensation
4. Reimbursement Agreements
5. Timing of Income and Deductions
6. Timing of Corporate Deductions for compensation Payments
F. Alternatives
G. How Is The Plan Set Up?
1
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H. Where Can I Find Out More About It?
I. Questions And Answers
J. Chapter Endnotes
FEATURED TOPICS:
Cash compensation planning
Reasonableness of compensation
CFP® CERTIFICATION EXAMINATION TOPIC: NONE
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of cash compensation planning
KEY WORDS:
Cash compensation
Rasonableness of compensation
Disallowed compensation
Reimbursement agreement
DISCUSSION:
1. Discuss the benefits of cash compensation versus non-cash
compensation.
2. Discuss factors involved in determining reasonable compensation.
QUESTIONS:
1. Which of the following are advantages to cash compensation?
(1) it must meet the reasonableness test for deductibility
(2) it is easier to budget than non-cash benefits
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(3) ERISA regulations are not normally involved
(4) cash compensation paid currently is currently taxable as ordinary income
a.
b.
c.
d.
(1) only
(1) and (2) only
(2) and (3) only
(3) and (4) only
Chapter 31, p. 271
2. What is the maximum amount of cash compensation paid to a CEO of a
publicly-held corporation normally allowed that will allow a deduction by the
company?
a.
b.
c.
d.
$750,000
$1,000,000
$5,000,000
$10,000,000
Chapter 31, p. 271
3. What is the typical treatment by the IRS of compensation paid to
shareholders that has been disallowed as being unreasonable?
a.
b.
c.
d.
assessed a 10% excise penalty
must be repaid prior to the end of the taxable year in which it was received
must be repaid no later than the tax filing deadline
treated as a dividend
Chapter 31, pp. 272-73
4. What is the maximum allowable deduction an employer can take for
compensation for services that are not rendered before the end of the taxable
year for which the deduction is claimed?
a.
b.
c.
d.
0%
5%
10%
25%
Chapter 31, p. 273
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ANSWERS:
1. c
2. b
3. d
4. a