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1. (a) Henry operates an illegal drug-running business and has the following items of income and...

1. (a) Henry operates an illegal drug-running business and has the following items of income and expense. What is Henry’s net income for tax purposes from this operation? Income $800,000 Expenses: Cost of goods sold 300,000 Rent 24,000 Utilities 9,000 Bribes to police 55,000 Insurance expense 5,000 Legal fees 25,000 Depreciation 30,000 Illegal kickbacks 30,000 (b) What is Henry’s net income for tax purposes from this operation if it is a legal business?

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Answer #1

Solution:

Income 800,000
Minus:
COGS 300,000
Rent 24,000
Utilities 9,000
Insurance expense 5,000
Legal fees 25,000
Depreciation 30,000 393,000
Henry’s net income for tax purposes 407,000

Bribes to police and Illegal kickbacks will not be included in computing the net income for tax purpose

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