Judy is a self-employed musician who performs for a variety of events. This year Judy was fined $250 by the city for violating the city's noise ordinance with a relatively loud performance. As a consequence, Judy contributed $1,000 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $33,000 to her employees through June of this year. In June Judy fired her part-time employees and hired her husband to replace them. However, Judy paid him $55,000 rather than $33,000. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

Answer explained below

Explanation:

Judy cant deduct the $250 ticket because its a violation of the law, even though it is related to her T/B it is avoidable, just like UPS cant deduct parking tickets. Political contributions are not deductible either, only charitable contributions are. The 33,000 for the employees that worked for her through June is an allowable business expense. The 55,000 she paid to her husband for the remainder of the year could be deductible, but since it is a significant increase since the previous employees she may have to prove, if audited, that her husband was more qualified and capable than the previous three employees which may be hard to do. This item is debatable since it really is a low amount in general and we dont know what her total income is so its hard to say if a 55,000 salary for 6months is appropriate relative to her business income.

So if Judy plays it safe she will deduct the following:

33,000 wages paid to first three employees + 11,000 paid to her husband (1/3 of 33,000 that was paid to three employees), for a total of 45,000 in business expenses.

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