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Darby runs an illegalnumbers racket. His gross revenues are $550,000, and heincu

ID: 2770946 • Letter: D

Question

Darby runs an illegalnumbers racket. His gross revenues are $550,000, and heincurs the following expenses:

Illegalkickbacks                                                                                $20,000

Salaries                                                                                          80,000

Rent                                                                                                     24,000

Utilities andtelephone                                                                      9,000

Bribes topolice                                                                             25,000

Interest                                                                                           6,000

Medical insurancepremiums foremployees                                    4,000

Depreciation onequipment                                                                   12,000

a.     What is Darby’s net income fromthis business that is includible in taxable income?

b.     If the business was an illegal drugoperation and cost of goods sold was $100,000, how would youranswer in part (a) differ?

Explanation / Answer

illegal kickbacks cannot be deducted IRS disallows a deduction for illegal bribes orkickbacks Income from illegal activities, such asmoney from dealing illegal drugs, must be included in yourincome on Form 1040, (Other income) you can deduct most business expenses directly related toillegal income (except for illegal expenses or expenses ) : a) Other Income*** : Grossrevenues                                                  550000 : Expenses: Salaries                           80000 Rent                                 24000 Utilities                             9000 interest                              6000 insurance                          4000 Depr                                12000                          135000 : NetIncome                                                         415000 : Net Income which is includable in Taxable Income is415000 :
b) the gross revenues would be reduced by 100000 and the Net Incomewould be further reduced to 315000........becausecost of good sold is deductible :
b) the gross revenues would be reduced by 100000 and the Net Incomewould be further reduced to 315000........becausecost of good sold is deductible