Question

Elisa and Clyde operate a retail sports memorabilia shop. For the current year, sales revenue is $55,000 and expenses are as follows:

Cost of goods sold $21,000 Advertising 1,000 Utilities 2,000 Rent 4,500 Insurance 1,500 Wages to Boyd 8,000

Elisa and Clyde pay $8,000 in wages to Boyd, a part-time employee. Because this amount is $1,000 below the minimum wage, Boyd threatens to file a complaint with the appropriate Federal agency. Although Elisa and Clyde pay no attention to Boyd's threat, Chelsie (Elisa's mother) gives Boyd a check for $1,000 for the disputed wages. Both Elisa and Clyde ridicule Chelsie for wasting money when they learn what she has done. The retail shop is the only source of income for Elisa and Clyde.

a. Calculate Elisa and Clyde's AGI.
$

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To be deductible, an expense must be incurred for the taxpayer's benefit or arise from the taxpayer's obligation. An individual cannot claim a tax deduction for the payment of the expenses of another individual. There is one exception.

b. Can Chelsie deduct the $1,000 payment on her tax return?

No

The obligation is that of Elisa and Clyde since it is related to their business.

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Correct

c. Assume instead that Chelsie makes a gift of the $1,000 to Elisa and Clyde and they pay the $1,000 to Boyd.

Can Elisa and Clyde deduct the $1,000 as part of the wage expense?

Yes

Can Chelsie (Elisa's mother) deduct the $1,000 payment to Boyd on her tax return?

No

Answer 1

Computation of Elissa and clyde's AGI
GrossSales		$55,000.00
Less : COGS		$21,000.00
grossprofit		$34,000.00
Less: Expenses:
Rent	$4,500.00
Advertising	$1,000.00
insurance	$1,500.00
utilities	$2,000.00
wages	$8,000.00	$17,000.00
Net Profit		$17,000.00

In Form 1040, Schedule C , $ 17000 will be showed as income . Total Income and AGI will be $17000

In order to improve the position of the parties......themother should treat this as a business gift to Elissa and then Elisa and Clyde can write off this 1000 dollars paid to Boyd. Also Elissa can then write off 25 dollars as a businessgift.