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

Elisa and Clyde's adjusted gross income (AGI) is $17,000, calculated by subtracting their total business expenses of $38,000 from their sales revenue of $55,000. Chelsie cannot deduct the $1,000 payment on her tax return as it is considered a personal gift, not a business expense.

Step-by-step explanation:

To determine Elisa and Clyde's adjusted gross income (AGI), we need to subtract their business expenses from their sales revenue. Their sales revenue is $55,000. The expenses are: Cost of Goods Sold of $21,000, Advertising of $1,000, Utilities of $2,000, Rent of $4,500, Insurance of $1,500, and Wages to Boyd of $8,000. The total expenses amount to $38,000 ($21,000 + $1,000 + $2,000 + $4,500 + $1,500 + $8,000). To calculate the AGI, we subtract the total expenses from the sales revenue: $55,000 - $38,000 = $17,000. Therefore, Elisa and Clyde's AGI is $17,000.

As for Chelsie's situation, generally if she is not part of the business and does not have a legal obligation to pay Boyd, she cannot claim the $1,000 payment on her tax return as a deductible business expense. Personal gifts are not deductible for the giver.

Answer 2

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.

Step-by-step 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.