In the Final Return that is filed by an Estate or Trust (Form 1041), certain items that normally may not be reported on the Schedule K-1 (Form 1041) Beneficiary's Share of Income, Deductions, Credits, etc., can be reported to the beneficiaries for inclusion on their tax returns. Specifically, certain "excess deductions", "capital loss carryovers" and "Net Operating Loss (NOL) carryovers" are reported to the beneficiaries on the final Schedule K-1 (Form 1041).
These Final Year Deductions are reported in Box 11 on the Schedule K-1 (Form 1041), and each deduction is discussed further below.
Excess Deductions occur only upon termination of the entity during the last tax year of the trust or decedent's estate, and when the total deductions (excluding the charitable deductions and the exemption available to the entity) are greater than the gross income for the entity for the year.
Excess deductions are reported in Box 11 of the Schedule K-1 (Form 1041) with a code of A. Generally, a deduction based on a Net Operating Loss carryover is not available to the beneficiary as an excess deduction. However, if the final year tax return (Form 1041) filed by the trust or estate is also the final year in which the NOL carryover can be taken by the entity, then the NOL carryover may be taken as an excess deduction. For additional information see Publication 536 - Net Operating Losses (NOL's) for Individuals, Estates or Trusts and also 26 CFR 1.642(h)-4 - Excess deductions on termination of an estate or trust.
A beneficiary succeeding to the property of a trust or estate is allowed any Unused Capital Loss Carryover(s), that remain upon termination of a trust or estate. The amount of the capital loss carryover that can be reported to beneficiaries is still subject to the trust or estate's reporting on the Final Return (Form 1041) of any amount of the current year's capital loss (or capital loss carryover) that is permitted in that tax year. If the trust or estate's capital losses including any carryover capital losses exceed their capital gains on the final tax return, the excess capital loss up to the annual limit of $3000 is deducted on the Final Tax Return (Form 1041).
Any remaining capital loss will be the Unused Capital Loss Carryover and reported to the beneficiaries. Any Short-Term Capital Loss Carryover is reported in Box 11 on the Schedule K-1 (Form 1041), with a code of B, and any Long-Term Capital Loss Carryover is reported in Box 11 on the Schedule K-1 (Form 1041), with a code of C.
Upon termination of a trust or estate, a beneficiary succeeding to the property of the entity may deduct any Net Operating Loss (NOL) if the carryover would be allowable to the trust or estate in a later year, but for the termination of the entity. Any NOL Carryover for regular tax purposed is reported in Box 11 on the Schedule K-1 (Form 1041), with a code of D, and any NOL Carryover for Alternative Minimum Tax purpose is reported in Box 11 on the Schedule K-1 (Form 1041), with a code of E.
To enter the Final Year Deductions in the Schedule K-1 (Form 1041), from the Main Menu of the Tax Return (Form 1041):
Select, Schedule K-1 Menu, then answer the question Automatically Distribute Schedule K Information? Normally this question should be answered YES and TaxSlayer Pro will automatically distribute all income items to the individual beneficiaries' K-1s based on the Beneficiary Income Allocation Percentage that is established for each beneficiary. If this question is answered NO, the user will have to make all entries on the individual K-1s manually and TaxSlayer Pro will not distribute the items to the individual K-1s. Regardless of how this question is answered, all Final Year Deductions that are to be reported in Schedule K-1 (Form 1041), Box 11 will be manually entered on the individual K-1s.
Select Schedule K-1 Input and then select New. You will be asked if the beneficiary is an Individual and be given the choice of Yes or NO. If you answer Yes the entry screen will be designed for an individual and require Name, Address Social Security Number and Beneficiary Income Allocation Percentage. If the beneficiary is not an Individual, you will be required to provide similar information except you will need the Employer Identification Number (EIN) for the beneficiary/entity. Because this is a final return, the Final K-1 question should be answered YES.
Select Allocate Share Items and on this menu, the Final Year Deductions are entered manually. This should be repeated for each beneficiary until 100% of the Final Year Deductions have been accounted for on the K-1s.
NOTE: This is a guide on entering Final Year Deductions into a Form 1041 and Schedule K-1 (Form 1041) in the TaxSlayer Pro program. This is not intended as tax advice.
Instruction for Form 1041 - U.S Income Tax Return for Estates and Trusts
Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040
Creating a Basic Form 1041 - U.S. Income Tax Return for Estates and Trusts