Final answer:
Nikki's taxable income for Scenario A is $0, because her discount did not exceed the company's cost of the diamond ring. In Scenario B, Nikki recognizes $125 as taxable income, because her discount on jewelry restoration services exceeded the exclusion limit of 20%.
Step-by-step explanation:
To answer the question regarding Nikki's taxable income as an employee of Shine Company in two different scenarios, we need to apply the rules for employee discounts which are considered a fringe benefit.
Scenario A: Purchase of a Diamond Ring
Nikki purchases a diamond ring for $10,000 which is normally sold for $14,000. The Shine Company's gross profit percentage is 40%. To determine the taxable income, we calculate the amount of discount given over the cost, not the gross profit. Shine Company's cost is 60% of the $14,000 sales price (100% - 40% profit), which is $8,400. Since Nikki bought the ring for $10,000, her discount is $10,000 - $8,400 = $1,600. However, the IRS allows employers to offer merchandise to employees at cost without incurring taxable income. Therefore, any discount above the cost is taxable. Since Nikki's discount does not exceed the company's cost, she recognizes $0 as taxable income from this transaction.
Scenario B: Jewelry Restoration Services
Nikki receives a 25% discount on jewelry restoration services. Normal repair cost is $500 but she pays $375. To find the taxable income in this scenario, the full value of the service received ($500) should be compared against what Nikki paid ($375). Nikki's taxable benefit is the discount received, which is $500 - $375 = $125. If the discount Nikki received on services is less than 20%, it is not considered taxable income. Since Nikki's discount of 25% exceeds this exclusion limit, the $125 would be recognized as taxable income.