Agnes Meher is the owner of LuPat, a profitable construction company that she operates as a sole proprietorship. As a sole proprietor, Agnes reports the business income from LuPat on her individual tax return. Agnes expects the business to generate $400,000 of taxable income this year. Combined with her other income, this will put her in the top tax bracket (37 percent). Agnes has two children named Ellie Mae and Spencer, ages 9 and 11, respectively, who do not currently have any taxable income. Agnes would like to shift some of her income from LuPat to Elle Mae and Spencer to reduce the overall tax burden from the business income. To shift the income, Agnes hired Ellie Mae and Spencer to perform some janitorial and clerical services for LuPat, paying each child $20,000. What do you think of Agnes's strategy?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Discuss the law that applies to this issue and then answer the questions at the end of the paragraph.

Agnes Meher is the owner of LuPat, a profitable construction company that she operates as a sole proprietorship. As a
sole proprietor, Agnes reports the business income from LuPat on her individual tax return. Agnes expects the
business to generate $400,000 of taxable income this year. Combined with her other income, this will put her in the
top tax bracket (37 percent). Agnes has two children named Ellie Mae and Spencer, ages 9 and 11, respectively, who do
not currently have any taxable income. Agnes would like to shift some of her income from LuPat to Ellie Mae and
Spencer to reduce the overall tax burden from the business income. To shift the income, Agnes hired Ellie Mae and
Spencer to perform some janitorial and clerical services for LuPat, paying each child $20,000. What do you think of
Agnes's strategy?
Transcribed Image Text:Agnes Meher is the owner of LuPat, a profitable construction company that she operates as a sole proprietorship. As a sole proprietor, Agnes reports the business income from LuPat on her individual tax return. Agnes expects the business to generate $400,000 of taxable income this year. Combined with her other income, this will put her in the top tax bracket (37 percent). Agnes has two children named Ellie Mae and Spencer, ages 9 and 11, respectively, who do not currently have any taxable income. Agnes would like to shift some of her income from LuPat to Ellie Mae and Spencer to reduce the overall tax burden from the business income. To shift the income, Agnes hired Ellie Mae and Spencer to perform some janitorial and clerical services for LuPat, paying each child $20,000. What do you think of Agnes's strategy?
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