Terry and Jim Are Both Involved in Operating Illegal Businesses

Multiple Choice

Terry and Jim are both involved in operating illegal businesses.Terry operates a gambling business and Jim operates a drug-running business.Both businesses have gross revenues of $500,000.The businesses incur the following expenses. $$\begin{array} { l r r } & \underline {\text { Terry} } & \underline { \text { Jim } } \\\text { Employee salaries } & \$ 200,000 & \$ 200,000 \\\text { Bribes to police } & 25,000 & 25,000 \\\text { Rent and utilities } & 50,000 & 50,000 \\\text { Cost of goods sold } & - 0 - & 125,000\end{array}$$ Which of the following statements is correct?

A) Neither Terry nor Jim can deduct any of these items in calculating the business profit.
B) Terry should report profit from his business of $250,000.
C) Jim should report profit from his business of $500,000.
D) Jim should report profit from his business of $250,000.
E) None of these.