Resolving diagnostic ref. 10901, Deductions not attributable to one class of income in ProConnect Tax

The following Suggestion is generating:

Deductions not attributable to one class of income have reduced the distributable income in one or more classes of income. Please see the DNI Diagnostic for further details. Ref. #10901

This informational suggestion generates when deductions have reduced more than one class of income. The class or classes of income being reduced are based on the K-1 Deductions method selected.

To view the DNI Diagnostic:

1. Go to the Check Return tab and click on Forms on the left side of your screen.
2. Select US.
3. Click on DNI Diagnostic.

If the DNI Diagnostic looks correct, no action is needed.

If this form looks incorrect or needs changes, read below about the different K-1 deduction methods and how each works.

Tier Allocation:

This method applies the deductions to different classes of income ahead of others until the deductions are used in full. After making an appropriate allocation to tax-exempt income, deductions are first allocated to interest, dividends, and other income, then to the extent that any remain, to passive income. Using tier allocation preserves the amount of passive income passed through to the beneficiaries so that it can be used to offset passive losses from other sources.

Pro-Rata Allocation:

This method allocates a percentage of the total deductions to a particular class of income equal to the same percentage that the particular class of income bears to the total income. For example, if interest income is 10% of the total income of the trust, then 10% of the total deductions are allocated to interest for Schedule K-1 allocations.

To change the K-1 Deductions method for a specific client:

1. Go to the Input Return tab.
2. On the left-side menu, select Sch. K-1.
3. Click on the Deduction Allocation for DNI screen.
4. Enter a 1 or 2 in Automatic allocation: 1=tier, 2=pro-rata [O].

Additional options available on this screen:

• Allocate charitable deductions to capital gains - This reduces the capital gains distributed to beneficiaries by virtue of an allocable portion of charitable deductions.
• Allocate non-charitable deductions to capital gains - This reduces the capital gains distributed to beneficiaries by virtue of an allocable share of deductions. If you leave this field blank, the program does not allocate any deductions to capital gains.
• Optimize qualified dividends (only use with tier allocation) - When this option is selected, the qualified dividends have deductions allocated to them after all other types of income (e.g. interest) except for capital gains.  If this option is not selected (or pro-rata deduction allocation is used) then expenses are allocated to the qualified dividends by the proportion of qualified dividends to total dividends.

Related topics

• How are estates and trusts defined in the Fiduciary module?
• How to make capital gains taxable to fiduciary instead of beneficiary in ProConnect Tax