Question

Janine's employer loaned her $5,000 this year (interest-free) to buy a used car. If the federal interest rate was 4%, which of the following is correct?

A. Janine recognizes $200 of taxable interest income.
B. Janine's employer recognizes $200 of deductible interest expense.
C. Janine recognizes $200 of imputed compensation income.
D. Janine recognizes $200 of imputed dividend income.
E. None of these.

Answer 1

Janine is not required to recognize any taxable interest income, deductible interest expense, or imputed dividend income because the loan from her employer was interest-free. However, she might recognize some imputed compensation income.

Step-by-step explanation:

Janine is not required to recognize any taxable interest income, deductible interest expense, or imputed dividend income because the loan from her employer was interest-free. However, she might recognize some imputed compensation income.

Imputed compensation income is the value of an economic benefit or service provided to an employee that is not included in their regular wages. In this case, Janine's employer provided her with a loan for a car, and by not charging any interest, Janine is receiving a benefit from her employer. The value of this benefit could be considered imputed compensation income.

Therefore, the correct answer is C. Janine recognizes $200 of imputed compensation income.