Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 8, 1993 TAG: 9303060056
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
GENEROSITY PUTS LIMIT ON LANDLORD
The Roanoke chapter of the Virginia Society of Certified Public Accountants will answer tax-related questions from our readers in a special feature on the Monday Money Page. Send them in writing to Tax Questions, in care of Mag Poff, Roanoke Times & World-News, P.O. Box 2491, Roanoke, Va. 24010.Q: I am retired. I have a furnished apartment (rented) in my home. The lessee, who is a semiprofessional, does not pay her rent regularly by the month. When she does pay her overdue rent, even a month late, I have not charged her the $1 a day late fee nor the $3 a day late fee after the first 10 late days as written in our rental contract.
Is there any method for deducting a percentage of this late fee loss on my income tax return?
A: No. It is assumed you report your income on a cash basis. Since you have not included the uncollected late fees in income, you cannot deduct them or any percentage of them as a loss.
Answered by Robert K. Flynn of Foti, Flynn, Lowen & Co.
Q: My wife and I have taken our retirement at age 55 from New York State jobs with pensions covered under New York State and local retirement systems. We have bought a home here in Virginia, and I am working 35 hours a week to supplement our income.
Do we have to claim our pensions as income and pay federal and state tax on it even though New York State considers it exempt? What states don't tax pensions from another state.
A: Generally, if you did not pay any part of the cost of your employee pension and your employer did not withhold any part of the cost from your pay while you worked, the amounts you receive each year are fully taxable and must be reported on your federal income tax return.
In addition, such pension distributions received before reaching age 59 1/2 are usually subject to an additional tax of 10 percent. However, in this particular situation, you appear to qualify for the exception to the additional tax (for payments received after separation from service) if the separation occurred during or after the calendar year in which you reached age 55. Thus the pensions payments would only be subject to the regular federal income tax.
Since these payments must be included in your federal return, they also must be included in your Virginia return. However, they may not actually be taxed.
First, there is a credit available for taxes paid to another state on any income that is also taxed by Virginia. This credit is designed to avoid double taxation and is claimed on Schedule CR.
In addition, there is an age deduction available for taxpayers 62 and over.
Unfortunately, since you are under 62 and you say the income is not taxed by New York, neither of these exceptions will help you.
In the year in which you moved to Virginia, however, you would only be taxed on those pension payments received after you became Virginia residents. You should complete Part I, Schedule of Income and Adjustments, on page 2 of Form 760PY (Virginia Individual Income Tax Return for Part-Year Resident).
The American Association of Retired Persons has a pamphlet that lists telephone numbers and addresses for the Departments of Revenue of the various states. Direct contact with the state you are interested in would be the easiest way to determine whether pension income from another state is taxable in that state. The pamphlet may be obtained from AARP Administrative Offices, National Headquarters, 601 E St., N.W., Washington, D.C. Or you can call 202-434-2277.
Answered by James B. Taney of Anderson & Reed.
Q: On Oct. 10, 1991, I bought, through a broker, 10 $1,000 Gulf State Utility Recallable bonds for $10,590 plus $42.19 accrued interest plus $3.75 handling fee for a total of $10,635.94. Interest of $506.25 would be paid on April 1 and Oct. 1 of each year. I received no interest in 1991, but did receive $506.25 on April 1 and Oct. 1, 1992, for a total of $1,012.50.
The bonds were recalled Dec. 29, 1992, for which I received $10,559 net after selling expenses plus $233.43 accrued interest.
How do I handle the accrued interest? What do I use for cost basis and sales price to determine capital gain or loss?
A: When bonds are sold between interest dates, part of the sale price represents interest accrued to the date of sale. The seller must report this interest in gross income. The purchaser must treat this amount as a capital investment and deduct it from the next interest payment he or she receives, as a return of capital.
In this example, you received $1,012.50 of interest which you must report on your 1992 Form 1040, Schedule B. Just below this amount, however, you are allowed a subtraction of $42.19, which represents the accrued interest you "purchased" in 1991. The caption "Return of Capital - Accrued Interest Paid" would describe the amount subtracted.
Conversely, the accrued interest of $233.43, which you received upon recall of the bonds in 1992, must be added to the amounts you report on Form 1040, Schedule B, possibly with the caption "Accrued Interest Received."
For purposes of determining your gain or loss from sale of the bonds, the bonds have a basis to you of $10,593.75. This amount reflects the original cost of the bonds ($10,590) plus expenses incurred to acquire them ($3.75). The selling price of the bonds is $10,559, which reflects the sale price of the bonds, less expenses incurred to dispose of them.
Answered by David Lucas of Lucas & Boatwright.
Q: Perhaps you can help in determining whether my home office use is deductible under the new regulations. I conduct a part-time business of teaching the use of a computer program. The training is conducted on the site of my clients.
My home office supports this business in the following ways:
To communicate with my clients in scheduling classes. I do this both by phone and via computer mail.
Keeping up to date with the computer program that I teach by dialing up the program that runs on a computer main-frame.
Writing auxiliary computer programs that are used in my training activities.
Writing, updating and binding training manuals that I provide to each student in a course.
Soliciting new clients via phone and letters.
Writing a synopsis of each training session, which is sent to the client.
Working on a project to make the course available on audio tapes, which would be sold to a client as a substitute for my personal instruction.
At present, my income comes from the teaching activities at the client's site but, for every day of teaching, I spend about three days of home office activity. If my project to sell audio tapes succeeds, I will conduct the business entirely from my home. I'd also like your opinion on whether the new home office regulations are likely to be enforced for 1992 returns.
A: The recent Supreme Court decision in Commissioner v. Soliman will probably have an unfavorable effect on your home office deduction unless the focus of your business changes.
Home office deductions are based on two primary considerations: 1) the relative importance of the activities performed in and outside the home office, and 2) the time spent in and outside the office.
Presently, you are in the business of personally teaching computer use. Your income generating activity is performed outside your office. Since this is your only income, consideration #1 would probably be given more weight in the decision, and your home office deduction would be disallowed.
You should be able to claim the home office deduction if 1) you make the course available on tape, 2) your primary source of revenue becomes sales of tapes, and 3) you make sales calls and ship the tapes from your home office.
The Soliman decision will be applied to 1992 tax returns. If you underestimated your quarterly income taxes because you relied on previous interpretations of the rules, you may be able to avoid an estimated tax penalty.
The IRS is currently revising Publication 587, "The Business Use of Your Home," to reflect the Supreme Court decision. Meanwhile, IRS Notice 93-12 gives examples and describes the way the IRS will apply the decision. You should consult these publications for more details.
Answered by Melinda T. Chitwood of Brown, Edwards & Co.
Correction
A question in last Monday's column about "Tigr" zero coupon bonds was answered by Martha Gilmore of McLeod & Co. The credit line was inadvertently omitted.