1041-US: Allocating indirect expenses (FAQ)

Alerts and notices

Question

What methods are available for allocating indirect expenses?

Answer

The following two methods are available for allocating indirect expenses among all income types.

  • The gross method is the default. Before the direct expenses reduce gross income on Schedule C, E, and F, UltraTax CS will allocate the indirect expenses. If you use this method, you'll get a greater deduction for indirect expenses on Form 1041 than the net method because less expense will be allocated to tax-exempt income.
  • The net method will reduce the gross income with direct expenses, and then with indirect expenses. To use the net method, enter in the Use net rather than gross method for allocating expenses field in Screen Allocate.

Example

Let's say your client gives you the following information. 

Income/expenses/fees Total
Rents $10,000
Direct expenses $6,000
Tax-exempt income $1,000
Indirect fiduciary fees $500


Here's the outcome of each method.

  • Gross method: $455 of the fiduciary fees will show on Form 1041, line 12 (500 x 10,000) / (10,000 + 1,000)
  • Net method: $400 of fiduciary fees will show on Form 1041, line 12 (500 x 4,000) / (4,000 + 1,000)

Related topic: 1041-US: Expense allocations (FAQs)