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Post Date:  6/27/2016
Last Updated:  6/27/2016

Summary
Cross References
- Fisher, T.C. Summary Opinion 2016-10

Business deductions are allowed under IRC section 162(a) when they are ordinary and necessary expenses paid or incurred in carrying on a trade or business. The determination of whether expenditures satisfy the requirements for deductibility depends on the facts and circumstances. Wages paid to compensate employees for personal services rendered are generally deductible. The Internal Revenue Code does not define an age in which an individual must be in order to qualify as an employee. Courts generally look to three factors when determining whether or not wages are deductible:
1) The wage paid is a reasonable amount,
2) The wage is based on services actually rendered, and
3) The wage is paid or incurred.

A recent court case illustrates the factors used by the courts when determining the deductibility of wages paid to minor children.

The taxpayer was a sole proprietor who worked as an attorney. She had three children, all of whom were under nine years old as of the close of the tax years in question. During summer school recesses, the taxpayer often brought her children into her office, usually for two hours a day, two or three days a week. She did this because at times other family members were not available to care for the children and also because day care was cost-prohibitive. She also believed that allowing her children to work in her office would help to teach them about the value of money and develop a healthy work ethic.

While at the taxpayer's office, the children provided various services to her in connection with her law practice. For example, the children shredded waste, mailed things, answered telephones, photocopied documents, greeted clients, and escorted clients to the office library or other waiting areas in the office complex. The children also helped the taxpayer move files from a flooded basement, they helped remove files damaged in a bathroom flood, and they helped to move the taxpayer's office to a different location.

The taxpayer did not issue a Form W-2 to any of her children for the years at issue. No payroll records regarding their employment were kept, and no federal tax withholding payments were made from any amounts that might have been paid to any of the children.

On one occasion, the taxpayer had to travel on business. Her husband was not able to tend to the children, so the taxpayer took them with her on the trip. She was concerned about entertaining the children during the long car rides she anticipated taking during the trip and came up with the idea of writing a book about the country that would be informative and hold the children's interest, or keep them busy while traveling by car. She had no previous experience writing or publishing books. It later occurred to her that other parents traveling with children might be interested in travel books created for children, and she decided to write a series of children's travel books each directed to a different destination in the United States or elsewhere.

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