Question

Strong Arm Steve, a cash basis calendar year taxpayer, runs an illegal protection business. Basically, small businesses in his neighborhood pay him money to gain protection from theft. During the current year, a bill, H.R. 55, is introduced into the state legislature which, if enacted, would legalize his protection racket. Strong Arm Steve had the following expenses for the year: Operating expenses in conducting his business $115,000 Payoffs to the cops to allow him to bully small businesses 15,000 Newspaper ads supporting H.R. 55, no mention of his business in the ad. 10,000 Political contributions to legislators who support H.R. 55 7,000 Of these expenditures, Strong Arm Steve may deduct:

Answer 1

Strong Arm Steve, a cash basis calender year taxpayer, runs an illegal protection business. For claiming the deduction on expenditure incurred the expenses must be legal. Of the above expenditures he cannot claim deduction on the expenses payoffs tothe cops to allow him to bully the small businesses because this is not a legal consideration. He cannot claim deduction on the newspaper ads because the name of the business is not mentioned in the ad so it cannot be taken as legal. Therefore, for claiming any tax deduction the expenses must be legal.