Is it based on income, if so do you include stock proceeds?
....... or is it based on asset values?
....... or is it based on asset values?
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Follow the income trail
IIRC, you deal with allocations related to the tax exempt income exclusive of the sale of an underlying asset (which is never "tax exempt"). OK...let me be careful here....I think there are some circumstances where disposition of certain clearly-defined TE assets is also tax exempt. I guess that would be a case-by-case scenario?
Where things get tricky is you may have two related adjustments - one for the IRS and another for the state (related to the sources of the tax exempt income).
Tax-exempt income. You cannot deduct expenses you incur to produce tax-exempt income. Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. ...
Expenses for both tax-exempt and taxable income. You may have expenses that are for both tax-exempt and taxable income. If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income.
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