IRS Clarifies: Deductibility of Administration Expenses for Estates and Non-Grantor Trust
Jean McDevitt, Tax Principal
On July 13, 2018, the IRS announced in Notice 2018-61 that the Service will issue regulations confirming that estates and non-grantor trusts will continue to be allowed to deduct expenses that are unique to the administration of an estate or non-grantor trust. The Tax Cuts and Jobs Act (TCJA) of 2017 had created confusion over whether such expenses would be deductible given the changes the Act made to the deductibility of certain expenses by individuals.
Under the TCJA, Section 67(g) was added to the Code, providing that “miscellaneous itemized deductions” are not permissible deductions for tax years 2018 through 2025. Generally, estates and non-grantor trusts compute their adjusted gross income (AGI) in the same manner as individuals. Of notable exception to that, however, Internal Revenue Code Section 67(e)(1) provides specifically that estates and non-grantor are allowed certain deductions to be taken “above the line” - in other words without consideration for the 2% floor limitation on certain itemized deductions.
Section 67(e)(1) and Treasury Regulation Section 1.67-4 provides, in particular, that tax preparation fees, appraisal fees, attorney fees, trustee fees, and certain other costs of administering an estate or non-grantor trust are deductible without applying the floor limitation. The key factor in determining whether an expense is fully deductible or limited by the floor is whether the expense is “commonly or customarily” incurred by individuals. If the expense is uniquely incurred because of the estate or trust administration process then a full deduction is allowed. Similarly, those expenses will continue to be allowed under the TCJA in arriving at an estate or non-grantor trust’s AGI.
It’s also worth noting here a number of other provisions regarding the deductibility of expenses by estates and non-grantor trusts under TCJA. First, similar to individuals, deductions for investment management fees will no longer be allowed (under current law through 2025 anyway). Second, the state and local tax deduction limitation of $10,000 will apply to estates and non-grantor trusts for the deduction of real property taxes, personal property taxes, and income taxes that are incurred, other than in the carrying on of a trade or business. Third, although personal exemptions have been suspended for individuals, non-grantor trusts and estates are still entitled to their personal exemptions under IRC Section 642 (b) (note the amounts are $100, $300, or $600 depending upon the entity structure).
And finally, the new 199A deduction for qualified business income is allowable to some trusts and estates. A thorough discussion of the 199A rules is beyond the scope of this piece; however, it is important to note that the recently released proposed regulations contain anti-avoidance rules that will allow the IRS to treat substantially similar trusts as a single entity for tax purposes. For a discussion of the proposed regulations, see BNN’s article, Proposed Section 199A Regulations are Issued.
If you have any questions regarding the Tax Cuts and Jobs Act and its impact on fiduciary income tax planning, please contact Jean McDevitt or your BNN tax advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.