Terry and Jim are both involved in operating illegal businesses.Terry operates a gambling business and Jim operates a drug running business.Both businesses have gross revenues of $500,000.The businesses incur the following expenses.
Terry
Jim
Employee salaries
$200,000
$200,000
Bribes to police
25,000
25,000
Rent and utilities
50,000
50,000
Cost of goods sold
-0-
125,000
Which of the following statements is correct?
A)Neither Terry nor Jim can deduct any of the above items in calculating the business profit.
B)Terry should report profit from his business of $250,000.
C)Jim should report profit from his business of $500,000.
D)Jim should report profit from his business of $250,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Terry can deduct employee salaries and rent and utilities, but not bribes, leading to a profit of $250,000. Jim cannot deduct any expenses related to illegal drug running, so his profit is not $250,000.

Terry and Jim Are Both Involved in Operating Illegal Businesses