1041-US: Allocating expenses (FAQ)

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Question

How are expenses allocated to different income types?

Answer

The following are various worksheets available to calculate allocation expenses.

Partnership / S Corporation worksheet

Each 1065 or 1120S activity generates a unit of this worksheet showing the income reported. Charitable, other, and miscellaneous deductions reported on an activity are only allocated to the income categories reported for that activity.

Example

A partnership has the following business income.

Income  Total
Business income $6,000
Interest income $1,000
Dividend income $500
Deductions related to portfolio income
not subject to a 2% limitation
$700

On the worksheet, $467 of the deduction is allocated to interest (700 x 1000) / (1000 + 500). No deduction is allocated to the business income because the deduction is related to portfolio income.

Allocation of deductions for tax-exempt income worksheets

These worksheets calculate a percentage of the tax-exempt income share of indirect expenses and an indirect portion for each type of expense. The total amount of each expense is displayed, including the allocation to an income type and indirect less the tax-exempt portion. When the application calculates the amounts used on the Allocation of Expenses by Income Type using the gross or net allocation method, it uses these amounts. 

Example

Using the partnership's business income in the first example, page 2 of the worksheets will show $700 as a direct allocation of Other deductions.

Allocation of expenses by income worksheet

Example

Using the partnership's business income in the first example, the expense allocated to interest and dividends on the Tax basis worksheet will match what is reported on the Partnership / S Corporation worksheet. None of the income or expense is reported on the Accounting Basis Worksheet because the activity is considered corpus as a default. The income and expense is reported on the Accounting Basis Worksheet if you enter distributions on Screen K1-3 or you enter an X in the Include income reported from pass-through entity instead of distributions in accounting income field on Screen Dist in the Allocation folder.

Related topic: 1041-US: Expense allocations FAQs

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