Question

Amanda and KC both operate illegal businesses. Amanda operates a gambling business thatinvolves high stakes poker games, and an exclusive clientele in the northeastern U.S. KC operates an unlicensed whisky distillery on her property in the Louisiana bayou and sells “under the counter” to bars in New Orleans. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Amanda KC 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 Amanda nor KC can deduct any of the above items in calculating the business profit. b. Amanda should report profit from her business of $250,000. c. KC should report profit from her business of$500,000. d. KC should report profit from her business of$250,000. e. None of the above

Answer 1

Answer to the question above is option A

Neither amanda nor KC can deduct any of the above items of expenses in calculating business profit.

As per IRS instructions , Income from illegal activities has to be included in the income on Form 1040 so this means that you have to report your income

However it does not allow you to deduct any expenses

Deduction of expenses is denied by IRS

so amongst all the answer stated above

answer option A is correct as no expenses will be allowed to get deducted from income