Novice Investors Can Get Free Help

QUESTION: I recently bought shares in two different companies. When I receive my statements, I’m not fully confident that I understand them. Also, I would like to become more active in the stock market, but I feel hampered by my lack of understanding of the market’s workings. Are there any publications aimed at the average reader who wants to understand the stock market?--A. R.

ANSWER: There are many such publications. For starters, you can ask one or more of the national stock brokerage firms for their brochures written for new investors. All you have to do is call a local branch office and request the pamphlet; typically, there is no charge. However, be prepared for a follow-up call from a broker looking for your business; nothing in life is completely free.

The stock exchanges themselves are another good source of information. For example, the New York Stock Exchange publishes an Investors Information Kit, a fairly extensive guide for the beginning investor. The price is $10, including postage and handling. You may obtain one by writing to the exchange at 1 Underhill Blvd., Syosset, N.Y. 11791.

Finally, your local public library should have a shelf full of books on business and investing. Our experts say the following titles are among the best for the novice investor: “Understanding Wall Street,” by Jeffrey B. Little and Lucien Rhodes; “How to Read and Understand the Financial News,” by Gerald Warfield, and “A Random Walk Down Wall Street,” by Burton Malkiel.

Q: I use my vehicle during the normal course of my job, and I am reimbursed by my employer at the rate of 20.5 cents per mile. May I depreciate my vehicle, and if so, how should I do it?--P. S.

A: Yes, you may depreciate the value of your car. But, be advised: it’s not going to be easy. The formulas are detailed and complicated, and, in the event of a tax audit, you should be prepared to produce precise records chronicling where and when you drove your car on business and how much money you spent maintaining it.

Although there are several automobile expense deduction systems available to the taxpayer, by far the easiest is the standard mileage rate deduction: 24 cents per business mile for the first 15,000 business miles you drive; 11 cents thereafter. But if you want to depreciate your vehicle, you must use what the IRS calls the “actual expense” method.

To employ the actual expense system, you will first need to determine the fair market value of your vehicle at the time you started using it for business. If you are just beginning to depreciate your car, the IRS says you must use a five-year schedule. For the first year, the IRS allows you to depreciate the vehicle by 20% of its fair market value, if you used it for business for more than 50% of miles driven. If you used it for business 50% or less, then the depreciation rate is 10%. In either case, the maximum amount for the first year is $2,560. (This limit was installed to curb the number of taxpayers claiming their luxury cars as business vehicles.)

Now, you must determine what percentage of the time you have driven your car for business, compared to personal use of the vehicle. Multiply your allowed depreciation by that percentage to arrive at your allowed business depreciation. Let’s say you’re entitled to depreciate your car by $2,000 in 1988 and the car was used for business 50% of the time. You’re entitled to $1,000 depreciation. But don’t stop here.

Now, you have to total your annual costs of maintaining your vehicle. Include all expenses: gas, oil, maintenance, insurance, repairs and other operating expenses. (This is why you must keep careful records.) Multiply the total by 50%, since you use your car only half the time on business. Let’s say you had $5,000 in expenses; the share allocated to your business use would be $2,500. Including depreciation, the total is now is $3,500.

However, you must now subtract the amount of mileage reimbursement you received from your employer. Any excess expense is considered a miscellaneous deduction and is added to the rest of your miscellaneous deductions. (Any excess reimbursement is considered ordinary income and you must report it.)

But, beware: Miscellaneous expenses are deductible on your income taxes only to the extent that they exceed 2% of your adjusted gross income. So, after doing all these mathematical computations, you may very well discover that you really don’t have anything--including depreciation--to deduct at all.

By the way, if your employer lists your mileage reimbursement on your W-2 statement of salary and wages, you are allowed to deduct--dollar for dollar--up to that amount. But any expenses incurred above the reimbursement level is subject to the 2% limit.

Use IRS Form 2106 to compute your deduction, and read the instructions carefully. You may also want to read a fuller explanation of the depreciation and business auto expense deductions in one of the many income tax manuals available at book stores and your public library.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.