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 (Elisas mother) gives Boy a check for $1,000 for the disputed wages. The retail shop is the only source of income for Elisa and Clyde.

Required:
a. Calculate Elisa and Clyde's AGI.
b. Can Chelsie deduct the $1,000 payment on her tax return?

Answer 1

Answer:

A. AGI $17,000

B. Chelsie cannot deduct the $1,000 payment on her tax return reason been that Chelsie is not in anyway entitled to a tax return deduction.

Explanation:

a. Calculation for Elisa and Clyde's AGI.

Sales revenue $55,000

Less Cost of goods sold ($21,000)

Advertising ($1,000)

Utilities ($2,000)

Rent ($4,500)

Insurance ($1,500)

Wages to Boyd ($8,000)

AGI $17,000

Based on the above calculation Elisa and Clyde can deduct the amount of $8,000 from the wages amount they paid to Boyd and secondly both Elisa and Clyde cannot deduct the amount of $1,000 that was paid by Chelsie.

b. Chelsie cannot deduct the amount of $1,000 which is the payment on her tax return reason been that Chelsie is not in anyway entitled to a tax return deduction.