Ray, 83, is a used car dealer. He lives in a rural community and operates the business out of his home. One room in his 6-room house is used exclusively for his business office. He parks the cars in his front yard, and when customers come along, they sit on the front porch and negotiate a sale price. The income statement for Ray's auto business is as follows: Sales $145,000 Cost of cars sold (75,000) Gross profit $70,000 Interest expense on cars $3,800 Property tax on cars 600 Gas, oil, repairs 1,100 Loan fees 3,500 Depreciation on equipment 2,000 (11,000) Net profit $59,000 If Ray's home were rental property, the annual depreciation would be $2,900. The utilities and upkeep on the home cost Ray $6,400 for the year. Ray's mortgage interest for the year is $2,400. When asked about the loan fees, Ray bitterly responds that Jim, the bank loan officer, charges him 5% of his gross profit on cars financed through the bank. Ray says, "The money is under the table, and if I don't shell out the cash, Jim won't loan the money to my customers to buy my cars. Everybody goes to Jim- he's got the cash." Complete the letter to Ray explaining the proper treatment of this information on his tax return. Do not round intermediate calculations. Round final amounts to the nearest dollar. If an amount is zero, enter "O". Dear Ray, Based on the income statement and other business related details, I am outlining, as follows, the tax treatment for your business expenses. The loan fees are not deductible as an ordinary expense related to selling used cars. They are a(n) illegal kickback Since 1/6 of your home is used for business, your home office deductions are utilities, $ ; interest $ ; and, depreciation $ The interest expense related to personal use of the home is an itemized deduction. Based on the information noted, I have revised your income statement as shown: Sales Cost of cars sold Gross profit $ Interest expense on cars $ Property tax on cars Gas, oil, repairs Loan fees Depreciation on equipment Business use of home Net profit