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
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