Velma and Clydeoperate a retail sports memorabilia shop. For the current year,sa
ID: 2770948 • Letter: V
Question
Velma and Clydeoperate a retail sports memorabilia shop. For the current year,sales revenue is $50,000 and expenses are as follows:
Cost of goods sold $19,000
Advertising 1,000
Utilities 2,000
Rent 4,000
Insurance 1,500
Wages to Boyd 7,000
Velma and Clyde pay$7,000 in wages to Boyd, a part-time employee. Since this amount is$1,000 below the minimum wage, Boyd threatens to file a complaintwith the appropriate Federal agency. Although Velma and Clyde pay no attention to Boyd’s threat. Chelsie (Velma’smother) gives Boyd a check for $1,000 for the disputed wages. BothVelma and Clyde ridicule Chelsie for wasting money when they learnwhat she has done. The retail shop is the only source ofincome for Velma and Clyde.
a. Calculate Velma and Clyde’sAGI.
b. Can Chelsie deduct the $1,000 payment onher tax return?
c. How could the tax position of theparties be improved?
Explanation / Answer
Chelsie cannot write off the $1000 paid to Boyd :Sch C*** : GrossSales 50000 lessCGS 19000 grossprofit 31000 : expenses: : Rent 4000 Advertising 1000 insurance 1500 utilities 2000 wages 7000 15500 : NetProfit 15500 : 1040 : Sch Cincome 15500 : total income andAGI 15500 : in order to improve the position of the parties......themother should treat this as a business gift to Velma and thenVelma and Clyde can write off this 1000 dollars paid to Boyd. Also Chelsie can then write off 25 dollars as a businessgift. : in order to improve the position of the parties......themother should treat this as a business gift to Velma and thenVelma and Clyde can write off this 1000 dollars paid to Boyd. Also Chelsie can then write off 25 dollars as a businessgift.
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