Question

Morris is the manager of a motel. As a condition of his employment, Morris is required to live in a room on the premises so that he would be there in case of emergencies. Morris considered this a fringe benefit, since he would otherwise be required to pay $600 per month rent. The room that Morris occupied normally rented for $60 per night, or $1,500 per month. On average, 90 percent of the motel rooms were occupied. As a result of this rent-free use of a room, Morris is required to include in gross income:

a) $600 per month
b) $1,500 per month
c) $60 per night
d) $0

Answer 1

As the manager of a motel, Morris is required to include the fair market value of the rent-free room he occupies in his gross income. The fair market value of the room is $1,500 per month, which would be taxable income for Morris.

Step-by-step explanation:

As the manager of a motel, Morris is required to live on the premises as a condition of his employment. He considers this living arrangement a fringe benefit, as he would otherwise have to pay $600 per month in rent. The room that Morris occupies normally rents for $60 per night, or $1,500 per month. However, since Morris is not paying rent for the room, he is required to include the fair market value of the room in his gross income.
The fair market value of the room is $1,500 per month. It does not matter that Morris is not paying the full amount, as the IRS considers the fair market value of a benefit provided to an employee to be taxable income. Therefore, Morris would include $1,500 per month in his gross income as a result of the rent-free use of the room.

Keywords: manager, motel, employment, fringe benefit, rent, fair market value, gross income, taxable income