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			(74,000)
Gross profit			$71,000
Interest expense on cars	$4,200
Property tax on cars	700
Gas, oil, repairs	1,100
Loan fees	3,550
Depreciation on equipment	1,900		(11,450)
Net profit			$59,550

If Ray's home were rental property, the annual depreciation would be $2,500. The utilities and upkeep on the home cost Ray $6,900 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 Jimhe'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 "0".

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, $fill in the blank 4; interest $fill in the blank 5; and, depreciation $fill in the blank 6. 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			$fill in the blank 8
Cost of cars sold			fill in the blank 9
Gross profit			$ fill in the blank 10
Interest expense on cars	$ fill in the blank 11
Property tax on cars	fill in the blank 12
Gas, oil, repairs	fill in the blank 13
Loan fees	fill in the blank 14
Depreciation on equipment	fill in the blank 15
Business use of home	fill in the blank 16		fill in the blank 17
Net profit			$ fill in the blank 18

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 $ 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 $