What is your opinion of the client\'s request? You are a CPA with a medium-size

Question

What is your opinion of the client's request?

You are a CPA with a medium-size accounting firm. One of your corporate clients is an electrical contractor in New York City. The client is successful and had $10 million of sales last year. The contracts involve private and government electrical work. Among the corporation’s expenses are $400,000 of kickbacks paid to people working for general contractors who award electrical subcontracts to the corporation, and $100,000 of payments to individuals in the electricians’ union. Technically, these payments are illegal. However, your client says that everyone in this business needs to pay kickbacks to obtain contracts and to have enough electricians to finish the projects in a timely manner. He maintains that it is impossible to stay in business without making these payments. In preparing its tax return, your client wants you to deduct these expenses. What is your opinion concerning the client’s request?

Explanation / Answer

The expenses incured on Kickbacks paid to people and to electricians are not a legal payment. This is also against the ethical business practices. This payment cannot be deducted from the income for taxation purpose. The payment may be necessary to provide for the generation of sales and this may be a practice used by other buisnesses but even though it is illegal and is not recognised by the government. So, it is not possible ti deduct these expenses from income.

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