Question

Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug (controlled substances) running business.

	Terry - Gambling	Jim-Drugs
Gross revenues	$500,000	$500,000
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

A. How much profit should Terry report for his gambling business on his tax return?

B. How much profit should Jim report for his drug running business?

Answer 1

Computing Profit reported by Terry and Jim

Particulars	A Terry (Gambling business) ($)	B Jim (Drug running business) ($)
Gross Revenue	500000	500000
Less: Cost of goods sold	(0)	(125000)
Gross profit	500000	375000
Less: Expenses:
Employee salaries	(200000)	(0) (Employee salaries are not deductible for Jim's illegal business of drug running)
Bribes to police	(0) (Bribes to police are not deductible expense)	(0) (Bribes to police are not deductible expense)
Rent and utilities	(50000)	(0) (Rent and utilities are not deductible for Jim's illegal business of drug running)
PROFIT REPORTED	$250000	$375000

A - Terry should report $250000 of profit for his gambling business on his tax return
B - Jim should report $375000 of profit for his Drug running business

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