[PasstheCPA7]

Hi guys, I am struggling with this Multiple Choice question below on Schedule C.

Tom and Sharlene had the following items of income and expense during the taxable year.

Self-employment activity:

Gross income: 35000

Business license fees: 500

Marketing expenses: 2,000

Salary paid to Sharlene: 10,000

Tom’s wages from his job: $67,000

Interest from money market: 1,500

Gain from sale of securities owned for 3 month 15,000

What is Tom & Sharlene’s gross income before adjustments?

So, we know that Sharlene cannot deduct the salary paid to herself on Schedule C because Sharlene is a co-owner. In other words, the $10,000 is not for an employee, but, it’s for her. If it was for an employee, Sharlene would be able to deduct it on Schedule C, but, again, it is not.

Therefore, what I don’t understand is shouldn’t this $10,000 salary paid to Sharlene be included as “income” on Schedule C? That’s where the confusion lies. How is this $10,000 a “draw” and not income?

My answer I got for this question was $126,000 (35,000 – 500 – 2000 + 10,000 + 67,000 + 1,500 + 15,000). However, it looks like the question is completely ignoring the $10,000 salary paid to Sharlene? I feel like that $10,000 needs to go somewhere.

Thank you!