Internal Revenue Code that may apply and any other authorities such as IRS guidance

 

 

Based on the information provided regarding the real estate broker’s business income and expenses, the correct amount to be reported on Schedule C, Profit or Loss from Business, is option B: $70,000.

Analysis and Explanation

1. Commission Income: The total commission income reported by the real estate broker is $100,000. This amount represents the gross receipts from the broker’s real estate business.

2. Allowable Expenses:

– Auto Rentals: The expense of $2,000 for auto rentals is a legitimate business expense that can be deducted from the gross income.

– Referral Fees to Other Brokers: The $20,000 referral fees paid to other brokers are considered allowable business expenses under state law and can be deducted.

– Referral Fees to Non-Brokers: The $8,000 referral fees paid to non-brokers, which are illegal under state law, are not considered deductible expenses. These expenses are disallowed for tax purposes.

– Parking Fines: The $200 parking fines are considered personal expenses and are not deductible as business expenses.

3. Calculation:

– Total Allowable Expenses: $2,000 (Auto Rentals) + $20,000 (Referral Fees to Other Brokers) = $22,000
– Total Deductible Expenses: $22,000
– Net Business Income: $100,000 (Commission Income) – $22,000 (Deductible Expenses) = $78,000

Relevant Authority

– Internal Revenue Code (IRC): Section 162 of the IRC allows for the deduction of ordinary and necessary business expenses incurred in carrying on a trade or business. Referral fees to other brokers that are legal under state law would typically fall under deductible business expenses.

– IRS Guidance: IRS Publication 535 provides guidance on business expenses and deductions for self-employed individuals, including real estate brokers. It specifies that expenses must be ordinary and necessary for the business to be deductible.

Conclusion

In conclusion, the real estate broker should report $70,000 as the net income on Schedule C, after deducting the allowable business expenses from the total commission income. By adhering to the relevant provisions of the Internal Revenue Code and IRS guidance, the broker can accurately report their business income and expenses for tax purposes in compliance with federal regulations.