NOL for Estates??

[DSMC_tax]

Thanks in advance for any guidance with this topic. I am working on a 1041 for an estate that will not be closed in 2018. There was very little income from Oil Royalties and huge amounts of Attorney, CPA and tax prep fees. The taxable income on line 17 of the 1041 form is around -23,000. I filled out the 1045 schedule A and backed out all the non business capital losses and non business income. I came up with a NOL of aroond -16,000.

With the new tax law, etc no more carryback which is okay because this is the initial 1041. I scoured the instructions and cannot find much guidance here, other than some folks are saying that just because there are attorney fees, etc that cause a negative taxable income that this doesn't necessarily make an NOL for the Estate.

It seems to me that the attorney fees are a necessary expense for the Estate and could be classified as litigation costs since the estate is in probate.

Any thoughts about creating the NOL for the estate to be carried forward so that the loss can be pass through to the beneficiaries at some point would be appreciated. It is very discouraging that new guidance has not been issued for the distributions of excess deductions to beneficiaries in year of estate termination yet, though it was promised in Notice 2018-61.

Note, my software pulled in all the numbers from the 1041 and I have done that correctly. Attorney and Fiduciary fees are allowed on the 1041.

[ATSMAN]

I am working on a 1041 right now (taxpayer died July of 2018) that has a NOL(approx 3000) for 2018 and estate will not close until sometime in 2019 because there is pending litigation between her children. I am carrying forward the NOL until the final 1041 is created and distributions passed on to heirs. This estate has a rental property and business that was terminated in 2018.

[DSMC_tax]

Hi, Thanks for the reply. Was the NOL generated by the rental and/or business only? Or were you able also include the attorney fees as part of the loss. That is the part I am struggling with. The decedent 1041 I am working on did not have any businesses. Do I have to file the 1045 at all? Thanks again.

[ATSMAN]

Hi, Thanks for the reply. Was the NOL generated by the rental and/or business only? Or were you able also include the attorney fees as part of the loss. That is the part I am struggling with. The decedent 1041 I am working on did not have any businesses. Do I have to file the 1045 at all? Thanks again.

Both. It is my understanding that attorney/accounting fees were subject to the 2% haircut unless it was specifically necessary for the "assets" of the estate then it was 100%. So now post TCJA the misc. items deduction is gone so the test for deducting attorney/accounting fees must meet the more stringent test.

[DSMC_tax]

Thank you. I believe that the attorney fees and fiduciary fees were necessary for the return I am working on as the executor had to go to probate with the assets. It is understood that all the ownership costs like lawn cutting, utilities for the decedent's home are now lost deductions that were subject to the 2% floor. I sure wish the IRS would issue their guidance. Thanks again.

[Burke]

See this link for information regarding this subject: IRS Notice 2018-61. Also https://www.mcb-cpa.com/irs-clarifie...-trust-expense-deductions. As well as others.
However, a decision, as to whether final excess deds for a beneficiary can be deducted on their personal return, has never been issued as far as I know. Per Pub 529 they are specifically excluded.

[DSMC_tax]

Yes I have read the notice. Thank you for the other link. What is amazing is the 2018 K-1 Box 11 Code A instructions state that the excess deductions on termination can be put on 1040 Schedule A line 16. Still waiting on those guidelines.

[Lion]

Extension!

[Burke]

Yes I have read the notice. Thank you for the other link. What is amazing is the 2018 K-1 Box 11 Code A instructions state that the excess deductions on termination can be put on 1040 Schedule A line 16. Still waiting on those guidelines.

On the last trust return K-1 that I recently prepared, which was a final, there was nothing in Box 11 but a long-term capital gain carryover. Nothing with Code A although there were excess deductions.

[Burke]

Thank you. I believe that the attorney fees and fiduciary fees were necessary for the return I am working on as the executor had to go to probate with the assets. It is understood that all the ownership costs like lawn cutting, utilities for the decedent's home are now lost deductions that were subject to the 2% floor. I sure wish the IRS would issue their guidance. Thanks again.

In most states (you don't give that information) an attorney is not needed just to probate a will. Did he perform other services? In my state, if an attorney is used to handle the administrative aspects that an executor would normally do, including probating the will, filing inventories, notification of heirs, distributions, payment of expenses, etc -- and the executor takes a fee -- the attorney's fees are subtracted from that executor's fee.

[DSMC_tax]

An attorney was required as an agent in the state where probated. The executor was not a resident so state law required it. Also required to probate it 2 additional states that also required lawyers. Executor has not taken any fee. Thanks for pointing this out. It is good to be able to defend the deductions if needed to do so.

[Burke]

In that case, I see no problem with deducting the attorneys' fees as a necessary expense of the estate on Line 14 of the tax return. These are taken in full. And the executor's fee may not be impacted. He would have to check with the Probate Court where the will was filed.

[Burke]

It seems to me that the attorney fees are a necessary expense for the Estate and could be classified as litigation costs since the estate is in probate.
Note, my software pulled in all the numbers from the 1041 and I have done that correctly. Attorney and Fiduciary fees are allowed on the 1041.

While I agree (see post above) regarding the deductibility on the 1041 of the attorneys' fees, the calculation of an NOL is different. The inclusion of these in the NOL if there is no eligible income (business, rental property to which specific fees apply) would in my opinion be ineligible, in the absence of actual litigation expenses as described in IRS Pub 536.

[DSMC_tax]

There was some royalty income.

[Burke]

Unless that royalty income was due to a working interest in which it would be reported as ordinary income perhaps subj to SE tax, I do not see where that would qualify. It is investment income. PS: In re-reading your OP, I notice you did not give a date of death. If in 2018, would a fiscal year treatment be helpful, pushing all income and deductions into 2019? That would give some time for Congress/IRS to give guidance.