Can you allocate Fiduciary Fees, Accountant and Attorney fees on a Complex Trust to different classes of income?

[AnmarieA]

Proconnect software automatically deducts these expenses from Interest and Dividends. Can they be allocated to Capital Gains instead? The software lets you override the amounts in the K-1 but the DNI Diagnostic only shows such expenses deducted from Interest and Dividends and does not change when you override the K-1 amounts. 

[qbteachmt]

Whew; let me try this:

Operationally, there will be income and expense. The fees are not deducted from interest and dividends. They are part of the P&L. If there was, for instance, rental property, there would be operating income from the rent and operating costs or expense from the operation, such as utilities, landscaping, etc.

Capital gains and losses are from Assets. For example, if you acquired rental property and there are expenditures such as fees associated with that acquisition, they might qualify to be part of the Basis, or invested cost. Then, when selling or depreciating, that total invested (basis) is used for determination of Capital gain or loss. They are not a write off directly, but are associated with what you got for that cost.

So, to review: fees and other recurring events are expense exactly because they are recurring and ongoing as part of operations; or, they relate to the entity, not to any specific investment or asset. That's why I teach it as Expense Vs Expenditure.

And look at the phrase Capital gain or loss. The word Capital helps you realize it relates to funds. For instance, paying an electricity bill = expense, because Poof! That was all used up. But putting in a swimming pool is an investment in that new Asset. That money is not all gone; it's right there, invested in that pool (capital improvement).

That means you need to determine what are these fees and costs and where do they fall in the tax regulation provisions.

Hope that helps.

[sjrcpa]

Under Trust Accounting principles, The Uniform Income and Principal Act, state law, and/or the Trust Document yes you can allocate those expenses to some or all categories of income and principal. 

Capital gains are generally corpus/principal. Is there a way to indicate, for example, Trustee fees are 50% income and 50% principal where you enter the expense, or options under Accounting Income? I don't use ProConnect.

[AnmarieA]

This response is unrelated to my question of the Trust Return and the K-1 reporting of the "net profit" of the Trust. Your response relates to fundamental accounting principals not what I was looking for but thanks anyways. 

[AnmarieA]

Thanks for your response as I allocated the fees as allowed and did an override of the software which is allows as well. I only prepare a few Form 1041s so if I am going to continue providing this service I will need to get some continuing education on Trust Accounting.  

[George4Tacks]

In ProConnect - INCOME and CORPUS are column headers for "Taxes and Fees"

[qbteachmt]

"Your response relates to fundamental accounting principals not what I was looking for but thanks anyways."

Directly to answering the question of allocation of "fees" to "capital gains" the answer is, it matters what is that fee.

Expense against income is the matching principal. Gain or loss is a determination.

A "fee" that is related to an Asset (and affects the basis for purposes of computing gain or loss) is not applied to the Gain itself; or it is an expense against income (not part of gain or loss). And yes, it is a bit of a fundamental to understand expenses against income is not the same as "fees" as expenditure against asset, because it is not against the capital gain or loss, but part of the determination of capital gain or loss.

Here is a real world examples of this; here in MT, a bar's liquor license is its own asset, and if you had to pursue or prove the license is converted from a county-zone license to a city-zone license (which significantly changes it marketability and FMV), the costs for that task are part of the license, not an operating expense.

Hope that provides some clarity for what I differentiated.