How could the tax position of the parties be improved

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Problem - 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.

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

c. How could the tax position of the parties be improved?

Reference no: EM131923276

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