United States

Regulations will confirm deductions for estates and non-grantor trusts

Notice 2018-61 is a welcome announcement for estates and trusts

INSIGHT ARTICLE  | 

On July 13, 2018, Treasury and the IRS announced in Notice 2018-61 that they intend to issue regulations providing favorable clarification of the effect of newly enacted section 67(g) on the deductibility of certain expenses that are incurred by estates and non-grantor trusts. While to a certain extent the Notice confirms what tax professionals thought all along, the Notice is still welcome as it clears up any ambiguity on an important aspect of estate and trust taxation and administration.

Background

Section 67(e)(1) allows estates and non-grantor trusts to deduct costs paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such estate or trust. Section 67(g), added to the Code by the Tax Cuts and Jobs Act, eliminated the deduction for miscellaneous itemized deductions for any taxable year beginning after Dec. 31, 2017 (and before Jan. 1, 2026). The implications of this change for individual taxpayers were clear, i.e., the expenses were no longer deductible. However, the implications for estates and non-grantor trusts were not so clear. That’s because, under section 67(e), the adjusted gross income of an estate or trust is computed in the same manner as that of an individual. Therefore, if the miscellaneous deductions were now eliminated for individuals, would they also be eliminated for estates and non-grantor trusts?

Miscellaneous itemized deductions

Treasury and the IRS now say that section 67(g) would not eliminate those deductions by estates and non-grantor trusts. Tracing through the provisions and definitions in the applicable subsections of section 67, they note that the suspension of the deductibility of miscellaneous itemized deductions does not affect the deductibility of payments which would not have been incurred if the property were not held in an estate or trust. However, an expense that commonly or customarily would be incurred by an individual (including the appropriate portion of a bundled fee) is affected by section 67(g) and thus is not deductible to the estate or non-grantor trust during the suspension of miscellaneous itemized deductions.

The Treasury Department and the IRS intend to issue regulations clarifying that estates and non-grantor trusts may continue to deduct expenses which would not have been incurred if the property were not held in an estate or trust in determining the estate or non-grantor trust’s adjusted gross income during taxable years 2018-2025.

Final year excess deductions

The Treasury Department and the IRS will also address some concerns that the enactment of section 67(g) will affect a beneficiary’s ability to deduct expenses that would not have been incurred if the property were not held in an estate or trust upon the termination of the trust or estate as provided in section 642(h). The Notice explains that excess miscellaneous itemized deductions under section 642(h)(2) will be suspended for tax years beginning after Dec. 31, 2017. The deductibility of net operating losses, capital loss carryforwards, and charitable contributions under 642(h)(1) and 642(c) will not be limited by the new section 67(g).

This notice is effective July 13, 2018. Estates and non-grantor trusts may rely on this notice for taxable years beginning after Dec. 31, 2017.

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