Tom operates an illegal drug-running operation and incurred the following expenses: $$\begin{array} { l r }
\text { Salaries } & \$ 75,000 \
\text { Illegal kickbacks } & 20,000 \
\text { Bribes to border guards } & 25,000 \
\text { Cost of goods sold } & 160,000 \
\text { Rent } & 8,000 \
\text { Interest } & 10,000 \
\text { Insurance on furniture and fixtures } & 6,000 \
\text { Utilities and telephone } & 20,000
\end{array}$$ Which of the above amounts reduces his taxable income?
A)$0.
B)$160,000.
C)$279,000.
D)$324,000.
E)None of the above.

Question

Tom operates an illegal drug-running operation and incurred the following expenses: $$\begin{array} { l r } 
\text { Salaries } & \$ 75,000 \
\text { Illegal kickbacks } & 20,000 \
\text { Bribes to border guards } & 25,000 \
\text { Cost of goods sold } & 160,000 \
\text { Rent } & 8,000 \
\text { Interest } & 10,000 \
\text { Insurance on furniture and fixtures } & 6,000 \
\text { Utilities and telephone } & 20,000
\end{array}$$ Which of the above amounts reduces his taxable income?
A)$0.
B)$160,000.
C)$279,000.
D)$324,000.
E)None of the above.

Quizplus · Accepted Answer

The cost of goods sold ($160,000) is the only expense that reduces taxable income, as it is a legitimate business expense recognized by the IRS, even if the income is generated through illegal activities. Other expenses related to illegal activities, such as salaries for illegal operations, kickbacks, and bribes, are not deductible.

Tom Operates an Illegal Drug-Running Operation and Incurred the Following