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. 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?