Ray, 83, is a used car dealer. He lives in a rural community and operates the busi- Communication Skills ness 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:

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 10% 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.”
Write a letter to Ray explaining the proper treatment of this information on his taxreturn.

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Sales Cost of cars sold Gross profit Interest expense on cars Property tax on cars Gas, oil, repairs Loan fees Depreciation on equipment Net profit $110,000 (78,000) S 32,000 $4,200 700 1,200 3,200 1,800(11,100) 20,900