Amber, a publicly held corporation, currently pays its president an annual salary of $900,000. In… 1 answer below »

Amber, a publicly held corporation, currently pays its president an annual salary of $900,000. In addition, it contributes $20,000 annually to a defined contribution pension plan for him. As a means of increasing company profitability, the board of directors decides to increase the president's compensation. Two proposals are being considered. Under the first proposal, the salary and pension contribution for the president would be increased by 30%. Under the second proposal, Amber would implement a performance-based compensation program that is projected to provide about the same amount of additional compensation and pension contribution for the president. a. Determine the new salary to be paid under Proposal 1 (the 30% increase). $ Determine the new contribution to the defined contribution pension plan to be paid under Proposal 1 (the 30% increase). $ Determine the amount of the new salary that would be deductible by Amber under Proposal 1 (the 30% increase). $ Determine the amount of the contribution to the defined contribution pension plan that would be deductible by Amber under Proposal 1 (the 30% increase). $ Assuming the statutory requirements for a performance-based compensation program are satisfied, under the second proposal, of the compensation paid to the president is deductible. b. Complete the letter to Amber's board of directors that contains the recommendation providing the best tax advantage to the company. Hoffman, Young, Raabe, Maloney, & Nellen, CPAs 5191 Natorp Boulevard Mason, OH 45040 September 16, 2016 Ms. Agnes Riddle Chairperson of the Board of Directors Amber, Inc. 100 James Tower Cleveland, OH 44106 Dear Ms. Riddle: I am responding to your inquiry regarding the proposed compensation plans for Amber's president. Under one proposal, both the salary and the pension contribution will be increased by 30%. Under the other option, a performance-based compensation program will be implemented that is projected to provide about the same additional compensation and pension contribution for the president. The 30% increase option will produce a salary of $ and a pension contribution of $ . Of this amount, only $ can be deducted by Amber. The salary paid to the president in excess of $ is disallowed as excessive executive compensation. Under the performance-based compensation option, of the compensation (the salary, bonus, and pension contribution) is tax deductible, assuming that the performance-based compensation satisfies the following requirements: Such compensation is based on company performance according to a formula approved by a board of directors' compensation committee (comprised solely of two or more outside directors) and by shareholder vote. The president's performance must be certified by this compensation committee. I recommend that you adopt the . I believe that it will better achieve Amber's objective of placing a greater emphasis on the relationship between performance and compensation. In addition, under this approach, of the compensation can be deducted on Amber's Form 1120. If you would like me to work with you in developing this program, let me know. Sincerely, Rex Edward, CPA Partner

 

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