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Allocation

Methods for allocation of indirect expenses

Gross method (default)

Before the direct expenses reduce gross income on Schedule C, E, and F, the application 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.

Net method

This method will reduce the gross income with direct expenses, then with indirect expenses. Mark the
Use net rather than gross method for allocating expenses
checkbox on the
Allocate
 screen.
Example:
Your client gives you the following income, expenses, and fees totals:
  • Rents: $10,000
  • Direct expenses: $6,000
  • Tax-exempt income: $1,000
  • Indirect fiduciary fees: $500
By the gross method: $455 of the fiduciary fees will show on Form 1041, line 12 ($500 x $10,000) / ($10,000 + $1,000).
By the net method: $400 of fiduciary fees will show on Form 1041, line 12 ($500 x $4,000) / ($4,000 + $1,000).
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