Question

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".

Answer 1

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Dear Ray ስጋ are an. illegal Kickback. $ 400 $ 483 Based on the income statement and other busines related details, I am outlining, as follows the tox treatment for your business expenses. The loan fees ($5,500) are not deductible as an Dzidiwasy, expenses related to selling essed cases. They Since / of your home is used for busress, your home office deductions are Utilities / 6400 X1/6) $12,067 Interest (2400x1/6) and capssciation 12900x168) $1,950 The interest expense related to paccdonal leve ak the home is an itemized deduction. (2400 X 5/6) = $2,400 Based on the integration ested, I have revised income statament as shown Sales $ 7,45,000 Cost of Cars Sold soos Googs front 70,000 Anterest exps on card 3,800 600 Propedy tox on cars Gios, depois Loon fees Sepreciation on equipment Business use of home Net foorit $ 60.550 ܩܘܐ ܝܐ 2000