ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, February 26, 1996 TAG: 9602270008
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: Tax Questions
Q: I lost my job in 1991 and returned to college. I graduated in January 1995, and my school loans matured six months later. I wrote a check and paid them in full.
Can I claim the entire balance on my 1995 return, or should I refile my earlier returns to reflect each year's costs even though the loans were deferred? I meet the employment criteria for eligibility to deduct educational expenses.
Also, should I refile my prior returns to deduct other college expenses (that is, apartment, telephone, food, mileage or other vehicle, books, supplies, etc.), and which ones are eligible?
A: Your education must relate to your present work. Education that will relate to future employment is not a qualifying education deduction. This includes any education that keeps you up to date for a return to work or that qualifies you to re-enter a job you had in the past. My follow-up phone call to you indicates you do not meet the employment criteria for eligibility to deduct educational expenses.
In order to deduct work-related educational expenses, you must (1) be working, (2) itemize your deductions on Schedule A (Form 1040) if you are an employee and (3) meet the qualifying education requirements.
Generally, to qualify, the education must: (1) be required by your employer or the law to keep your present salary, status or job (and serve a business purpose of your employer) or (2) maintain or improve skills needed in your present work.
However, it still might not qualify if it is needed to meet the minimum educational requirements of your present trade or business or if it is part of a program of study that can qualify you for a new trade or business (whether you plan to enter that trade or business or not).
If you, in fact, had qualifying educational expenses, you would have deducted them in the year you paid for them. Deductible expenses would include tuition, books, supplies and similar items, certain transportation and travel costs, and other educational expenses. You would not include any personal or capital expenses. Because it appears you do not qualify, there is no need to amend any prior returns.
All of this is explained in greater detail in IRS Publication 508, which can be obtained from your nearest IRS office or almost any tax preparer.
-Answered by Terrence Clem of Miller, Morgan, Agee & Clem.
Q:I have taken a personal loan on behalf of my son to enable him to buy equipment to establish his business. He is making the monthly payments. Is there a way, acceptable to the IRS, that my son can claim the interest as a business expense?
A: Interest is generally deductible for a business debt if the loan is structured properly. To deduct interest paid, you must be liable for its payment, that is liable on the note. In this example, a note agreement should exist between father and son making the son liable for a debt to the father.
The consequences of a note between father and son are as follows:
The father must report interest income received.
The father can deduct investment interest on Schedule A of Form 1040 (interest paid to the bank). Investment interest deductions are limited to net investment income.
The son can deduct business interest paid to his father.
Another way to handle this problem would be for the father and son to refinance the loan with the son as borrower and the father as guarantor.
-Answered by Clark Cole of Cole & King
Tax-related questions from our readers are answered by members of the Roanoke chapter of Virginia Society of Certified Public Accountants. This feature runs every Monday on the Money Page through April 8. Please send your questions to Tax Questions, The Roanoke Times, P.O. Box 2491, Roanoke 24010.
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