Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 14, 1994 TAG: 9402140337
SECTION: BUSINESS PAGE: A8 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
\ Q: I formed my own consulting company as of Sept. 3, 1993. In addition, I converted one of two autos to 100 percent business use. That auto, purchased with a loan in October 1991, had interest paid on the loan during 1993 of $961.30.
Can any of that interest paid be deducted on my Schedule C, Part II, Line 10 as an actual expense of my auto used 100 percent in my business?
Since this auto is registered under my personal name, would there be any advantage for tax purposes to sell it and lease a vehicle in the company name?
A: There are two ways to deduct your auto costs on your income tax return for 1993. You can choose to:
Deduct the standard mileage rate for all of your business miles, or
Deduct the actual expenses of operating your vehicle.
The standard mileage rate is 28 cents per mile for 1993 and 29 cents for 1994. If you want to use the standard mileage rate for a business auto, you must use this method the first year you place the car in business use. In addition to the standard rate, you can also deduct the amount of interest you paid on your auto loan during the time it was used for business. The interest deduction goes on Schedule C.
The second method will require you to keep records of all auto expenses such as gas, oil changes and the like. You will also be able to deduct an amount for depreciation. This method generally gives you a larger deduction. However, it also requires more record keeping.
If you convert the auto to business use and then sell it, you could have taxable income on the sale.
If you lease a car, you can deduct the lease payments on your Schedule C. However, you may also have to add an "inclusion amount" to your income. The inclusion amount is a percentage of part of the fair market value of the leased car multiplied by the percentage of business use of the car for the tax year. To find out the dollar amount, you can use an IRS table provided in the publication described below. The effect of this inclusion amount is to disallow part of the lease payment that you deducted.
The tax advantage or disadvantage of any of these methods will depend on the cost of the vehicle and your amount of business use. To get more details on your auto deduction, you can get Publication 917 from the IRS. This free booklet is titled "Business Use of a Car." Call (800) TAX-FORM to request a copy.
Answered by Melinda Chitwood of Brown, Edwards & Co.
\ When I make a withdrawal from a tax-deferred annuity (10 percent a year of the original payment is allowed without incurring a surrender charge), early the following year I receive a form 1099 indicating that the entire withdrawn amount is taxable. My thinking is that the amount withdrawn can be pro-rated between principal (the original payment) and interest earned.
If the withdrawal can be pro-rated, does the taxpayer attach a statement to the return explaining the calculation?
If the entire withdrawal is taxable as income, does that mean that all withdrawals are fully taxable until the account balance is reduced to the amount of the original investment?
A: Generally, if you did not pay any part of the cost of your annuity, the amounts you receive each year are fully taxable.
If you paid part of the cost of your annuity, you are not taxed on the part of the annuity you receive that represents a return of your cost. The rest of the amount you receive is taxable.
You may use either the General Rule or the Simplified General Rule to determine the taxable and nontaxable parts of your annuity. You should consult Internal Revenue Service Publication 17, "Your Federal Income Tax," to determine which method you are qualified to use.
You should report the total annuity, as reported on the form 1099, on line 17A and the taxable part on line 17B of form 1040. Publication 17 contains worksheets you can use to determine the taxable part of the annuity. You are not required to attach these worksheets to the return. You are to keep them with your tax records to prove to the IRS how you determined the taxable part if your return is examined.
Answered by Gary Duerk of Brown, Edwards & Co.
\ Q: Last year my niece drew Aid to Families with Dependent Children and also some welfare because she is a single parent. Are either of those taxable and, if so, where would we get anything in writing?
A: Welfare benefits and payments received under the AFDC program are not taxable income. However, such payments can come into play in determining whether you have furnished more than one-half the cost of keeping up a home for head of household status, or more than one-half the support of a person in order to claim an exemption.
Explanations are reflected on pages 13, 14 and 15 of the 1993 Form 1040 instructions.
(Answered by Robert K. Flynn of Foti, Flynn, Lowen & Co.)
by CNB