Publication 550 |
2000 Tax Year |
Expenses of Producing Income
You deduct investment expenses (other than interest expenses) as
miscellaneous itemized deductions on Schedule A (Form
1040). To be deductible, these expenses must be ordinary and necessary
expenses paid or incurred:
- To produce or collect income, or
- To manage property held for producing income.
The expenses must be directly related to the income or
income-producing property, and the income must be taxable to you.
The deduction for most income-producing expenses is subject to a
2% limit that also applies to certain other miscellaneous
itemized deductions. The amount deductible is limited to the total of
these miscellaneous deductions that is more than 2% of your adjusted
gross income.
For information on how to report expenses of producing income, see
How To Report Investment Expenses, later.
Attorney or accounting fees.
You can deduct attorney or accounting fees that are necessary to
produce or collect taxable income. However, in some cases, attorney or
accounting fees are part of the basis of property. See Basis of
Investment Property in chapter 4.
Automatic investment service and dividend reinvestment plans.
A bank may offer its checking account customers an automatic
investment service so that, for a charge, each customer can choose to
invest a part of the checking account each month in common stock. Or,
a bank that is a dividend disbursing agent for a number of
publicly-owned corporations may set up an automatic dividend
reinvestment service. Through that service, cash dividends are
reinvested in more shares of stock, after the bank deducts a service
charge.
A corporation in which you own stock also may have a dividend
reinvestment plan. This plan lets you choose to use your dividends to
buy more shares of stock in the corporation instead of receiving the
dividends in cash.
You can deduct the monthly service charge you pay to a bank to
participate in an automatic investment service. If you participate in
a dividend reinvestment plan, you can deduct any service charge
subtracted from your cash dividends before the dividends are used to
buy more shares of stock. Deduct the charges in the year you pay them.
Clerical help and office rent.
You can deduct office expenses, such as rent and clerical help,
that you pay in connection with your investments and collecting the
taxable income on them.
Cost of replacing missing securities.
To replace your taxable securities that are mislaid, lost, stolen,
or destroyed, you may have to post an indemnity bond. You can deduct
the premium you pay to buy the indemnity bond and the related
incidental expenses.
You may, however, get a refund of part of the bond premium if the
missing securities are recovered within a specified time. Under
certain types of insurance policies, you can recover some of the
expenses.
If you receive the refund in the tax year you pay the amounts, you
can deduct only the difference between the expenses paid and the
amount refunded. If the refund is made in a later tax year, you must
include the refund in income in the year you received it, but only to
the extent that the expenses decreased your tax in the year you
deducted them.
Fees to collect income.
You can deduct fees you pay to a broker, bank, trustee, or similar
agent to collect investment income, such as your taxable bond or
mortgage interest, or your dividends on shares of stock.
Fees to buy or sell.
You cannot deduct a fee you pay to a broker to acquire investment
property, such as stocks or bonds. You must add the fee to the cost of
the property. See Basis of Investment Property in chapter 4.
You cannot deduct any broker's fees, commissions, or option
premiums you pay (or that were netted out) in connection with the sale
of investment property. They can be used only to figure gain or loss
from the sale. See Reporting Capital Gains and Losses, in
chapter 4,
for more information about the treatment of these sale
expenses.
Investment counsel and advice.
You can deduct fees you pay for counsel and advice about
investments that produce taxable income. This includes amounts you pay
for investment advisory services.
Safe deposit box rent.
You can deduct rent you pay for a safe deposit box if you use the
box to store taxable income-producing stocks, bonds, or other
investment-related papers and documents. If you also use the box to
store tax-exempt securities or personal items, you can deduct only
part of the rent. See Tax-exempt income under
Nondeductible Expenses, later, to figure what part you can
deduct.
State and local transfer taxes.
You cannot deduct the state and local transfer taxes you pay when
you buy or sell securities. If you pay these transfer taxes when you
buy securities, you must treat them as part of the cost of the
property. If you pay these transfer taxes when you sell securities,
you must treat them as a reduction in the amount realized.
Trustee's commissions for revocable trust.
If you set up a revocable trust and have its income distributed to
you, you can deduct the commission you pay the trustee for managing
the trust to the extent it is to produce or collect taxable income or
to manage property. However, you cannot deduct any part of the
commission that is for producing or collecting tax-exempt income or
for managing property that produces tax-exempt income.
If you are a cash-basis taxpayer and pay the commissions for
several years in advance, you must deduct a part of the commission
each year. You cannot deduct the entire amount in the year you pay it.
Investment expenses from pass-through entities.
If you hold an interest in a partnership, S corporation, real
estate mortgage investment conduit (REMIC), or a nonpublicly offered
regulated investment company (mutual fund), you can deduct your share
of that entity's investment expenses. A partnership or S corporation
will show your share of these expenses on your Schedule K-1. A
nonpublicly offered mutual fund will indicate your share of these
expenses in box 5 of Form 1099-DIV, or on an equivalent
statement. Publicly-offered mutual funds are discussed later.
If you hold an interest in a REMIC, any expenses relating to your
residual interest investment will be shown on line 3b of Schedule
Q (Form 1066). Any expenses relating to your regular interest
investment will appear in box 5 of Form 1099-INT or box 7 of
Form 1099-OID.
Report your share of these investment expenses on Schedule A (Form
1040), subject to the 2% limit, in the same manner as your other
investment expenses.
Including mutual fund or REMIC expenses in income.
Your share of the investment expenses of a REMIC or a nonpublicly
offered mutual fund, as described above, are considered to be indirect
deductions through that pass-through entity. You must include in your
gross income an amount equal to the amount of the expenses allocated
to you, whether or not you are able to claim a deduction for those
expenses. If you are a shareholder in a nonpublicly offered mutual
fund, you must include on your return the full amount of ordinary
dividends or other distributions of stock, as shown in box 1 of Form
1099-DIV or an equivalent statement. If you are a residual
interest holder in a REMIC, you must report as ordinary income on
Schedule E (Form 1040) the total amounts shown on lines 1b and 3b of
Schedule Q (Form 1066). If you are a REMIC regular interest holder,
you must include the amount of any expense allocation you received on
line 8a of Form 1040.
Publicly-offered mutual funds.
Publicly-offered mutual funds, generally, are funds that are traded
on an established securities exchange. These funds do not pass
investment expenses through to you. Instead, the dividend income they
report to you in box 1 of Form 1099-DIV is already reduced by
your share of investment expenses. Therefore, you cannot deduct the
expenses on your return.
Include the amount from box 1 of Form 1099-DIV in your
income.
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