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 for rent. The room that Morris occupied normally rented for $60 per night, or $1,500 per month. On average, 90% 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.$1,350 ($1,500 × 0.90).
b.$1,500 per month.
c.$600 per month.
d.$0.
e.$150 [$1,500 × (1 - 0.90)].

Answer 1

Morris, the motel manager, is required to include the value of the fringe benefit of rent-free accommodation in his gross income. The value of this benefit is most appropriately reflected by the rent he avoids paying elsewhere, which is $600 per month.

Step-by-step explanation:

The question concerns the inclusion of fringe benefits in gross income for tax purposes. In the given scenario, Morris, the manager of a motel, is required to live on the premises for emergency purposes and does not pay rent for the room which would otherwise cost him $600 per month. Since Morris is required to include the value of the rent-free use of the room in his gross income and the room is normally rented for $60 per night, the usual method is to include the amount he is saving on rent. However, since the room has an average monthly rent of $1,500 and 90% occupancy, one could consider $1,350 as its value, but this does not represent the actual economic benefit to Morris. The correct inclusion amount would likely be the amount he saves by not having to pay rent elsewhere, which is $600 per month, as this represents the real benefit conferred upon Morris by the motel.