Deductions reducing distributable income on Form 1041 diagnostic ref. 10901 in ProConnect Tax

When preparing a Fiduciary return, you may encounter the following informational diagnostic:

"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 diagnostic 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.

Available deduction methods:

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.