The latest (10/21/2020) draft of instructions to the Schedule K-1 for Form 1041 provides guidance for reporting excess 67(e) deductions by beneficiaries of terminating estates and trusts that is similar to the guidance that was previously reported from the IRS website. The instructions now say:
“Box 11, Code A–Excess Deductions on Termination – Section 67(e) Expenses
“If this is the final return of the estate or trust, and there are excess deductions on termination that are section 67(e) expenses reported to you as a beneficiary, you may deduct the excess deductions shown in box 11, code A, as an adjustment to income. Report this amount as a write-in on Schedule 1 (Form 1040), Part II, line 22. On the dotted line next to line 22, enter the amount of the expense using the code ‘ED67(e)’. Include the expense in the total amount reported on line 22.”
Excess deductions that are not 67(e) deductions and are not miscellaneous itemized deductions are reported by individuals on Schedule A of Form 1040 on the appropriate line for the type of deduction. (The draft instructions state that “The fiduciary will provide you with a statement of allowable deductions.”)
What is not addressed by the draft instructions is how a testamentary trust would report excess 67(e) deductions on the termination of an estate, and that question has been submitted to the IRS as a comment on the draft.
For an explanation of the new regulations on the treatment of excess deductions on termination of estates and trusts, see “Final Regulations on Administration Expenses and Excess Deductions.”