Question

SECTION 2 (15 points) Answer the following questions by filling in the blanks in the spaces provided below. Axel and Big Tiny both operate businesses in Colorado. Axel operates a poker club in Vail. Gambling is illegal in Colorado. Big Tiny operates a medical marijuana facility in Colorado Springs, which is a legal business for state purposes only. Both businesses have gross revenues of $500,000. The businesses incur the following expenses Big Tiny Axel $200,000 20,000 $200,000 20,000 25,000 Employee salaries llegal kickbacks to local councilwoman Bribes to local EPA officials Bribes to local police Rent Interest paid on business loarn Insurance coverage for facility& employees Utilities & Telephone Cost of goods sold 25,000 40,000 10,000 6,000 10,000 40,000 10,000 6,000 10,000 25,000 For Federal tax purposes only, compute Axel's and Big Tiny's net profit from their businesses (be sure to show your work): AXEL Gross revenues Cost of goods sold Gross income Expense Expense Expense Expense Expense Net profit

Answer 1

As per chapter 11 of Pub. 535 in 2018 , "Engaging in the payment of bribes or kickbacks is a serious criminal matter" and any expense made towards this head can't be deducted for tax calculation purposes.

Here , the calculation:

	Axel	Big Tiny
Gross Revenues	$500,000	$500,000
Cost of good sold	$0	($125,000)
Gross Income	$500,000	$375,000
Expense for Employee Salaries	($200,000)	($200,000)
Rent	($40,000)	($40,000)
Interest Paid	($10,000)	($10,000)
Insurance	($6,000)	($6,000)
Utilities and telephone	($10,000)	($10,000)
Total expenses	($266,000)	($266,000)
Net Profit	$234,000	$109,000