business taxes, business tax deductions, deduction limits, business expense threshold limits, De Minimis Safe Harbor Expense ThresholdOn September 21, 2020, the Internal Revenue Service issued final regulations in regard to the deductibility of expenses of estates and non-grantor trusts.  The Tax Cuts and Jobs Act (TCJA), which was passed previously, bars individuals from claiming miscellaneous itemized deductions for the years 2018 through 2025.  After the passage of the TCJA, there are questions on how such barred itemized deductions would impact estates and non-grantor trusts.

The final regulations state that deductions for costs which were paid or incurred in connection with the administration of an estate or trust and which would not have been incurred if the property was not held in such estate or trust, remain deductible in computing adjusted gross income.  In addition, deductions are allowed for the personal exemption of an estate or non-grantor trust, for income distributed currently and for accumulated income and corpus.

The final regulations also state that excess deductions retain their nature in the hands of each beneficiary.  There is a three-step process to determine the nature of excess deductions of an estate or trust.  Under step one, direct expenses are allocated first (e.g., real estate taxes offset real estate rental income).  Under step two, the executor or trustee has discretion while allocating the remaining deductions.  The executor or trustee can offset less favored deductions for beneficiaries by using them against remaining estate or trust income.  Under step three, once all of the estate or trust income has been offset, the remaining deductions constitute excess deductions and are allocated to beneficiaries.

The final regulations also require that the information concerning excess deductions be reported to beneficiaries when the estate or trust terminates.

The final regulations provide that an estate or trust beneficiary cannot carry back a net operating loss carryover that is passed out of an estate or trust in its final year.

If you have additional questions or would like assistance with these items, please contact us at our office by calling 515-225-1100 or sending us a message through the contact form within this Web site.