| January 28, 2015

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?

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