[carpeCPA]

This question was previously raised but not answered. Can someone please explain why the fees allocable to corpus are subtracted in calculating DNI? Also, can someone explain the difference between fiduciary income and DNI? Thanks!!

Here’s the question from Becker:

Skipper Family Trust, a simple trust, reported the following items of income and expenses during the year:

Ordinary income from rental properties (gross) $ 5,000

Taxable dividend income 1,500

Interest income from corporate bonds 1,000

Interest income from tax-exempt municipal bonds 500

Rental expenses 2,500

Trustee fees allocable to income 1,000

Trustee fees allocable to corpus 500

What is Skipper Family Trust’s distributable net income (DNI) for the year?

Here’s the answer:

Trust gross income:

Rental income $ 5,000

Dividend income 1,500

Interest income from corp. bonds 1,000

Total: $ 7,500

Less: Trust deductions allocable to income

Rental expenses $ (2,500)

Trustee fees allocable to income (1,000)

Total: (3,500)

Adjusted total income 4,000

Plus: Adjusted tax-exempt interest 500

Less: Capital gains allocable to corpus 0

Less: Trustee fees allocable to corpus (500)

Distributable net income = $ 4,000

REG - 93 (Jul'13)
FAR - 97 (Dec '13)
AUD - 99 (May '14)
BEC - Jul '14

Becker Self Study/Ninja Notes/Ninja Audio/Ninja MCQ/Wiley Test Bank/Wiley Book

[barelystayingsane]

Trustee fees are always deductible when computing DNI. It doesn't matter if they're allocable to corpus or income. That's just meant to throw you off.

[barelystayingsane]

Trustee fees are always deductible when computing DNI. It doesn't matter if they're allocable to corpus or income. That's just meant to throw you off.

[barelystayingsane]

Regarding the difference between fiduciary income and DNI, I believe fiduciary income is accounting income, which means that you do not subtract expenses allocable to corpus. For accounting/fiduciary purposes, “allocable to corpus” = IGNORE. At least, that's how I always understood it.

[barelystayingsane]

Regarding the difference between fiduciary income and DNI, I believe fiduciary income is accounting income, which means that you do not subtract expenses allocable to corpus. For accounting/fiduciary purposes, “allocable to corpus” = IGNORE. At least, that's how I always understood it.

[Heidi-O]

@Rache1 A fiduciary is a trust or estate. It's just another name for it. There is someone that has fiduciary responsibilities with a Trust – known as the trustee and with an Estate – known as the executor.

Essentially, DNI is the amount that an Estate or Trust can deduct from their tax return. The Trust has someone that controls the assets (the Corpus) of the trust and either invests them or monitors them (rental activity). Those assets or Corpus make money! (well… hopefully) That money is considered taxable income to the Trust or Estate. BUT, there are expenses involved in monitoring and controlling the estate or trust – attorneys, tax return preparers and the fiduciaries of the Truss or Estates. The Trust and Estates are allowed to Deduct those expenses from their Earned income for that year. As barelystayingsane said, it does not matter if those expenses relate to the corpus of the trust or the investment income of the trust – they are still deductible expenses.

The Distributable Net Income is the Net Income that the Trust made during the year which is the Income (dividends, interests, rental) – Expenses (rental fees, legal fees, tax prepare fees, banker fees) = Distributable Net Income

On the Tax Return for the Trust or Estate (1041), they can deduct the lesser of the DNI (less non taxable income) or the amount distributed to beneficiary (less non taxable income). It is not fair for the Trust to pay taxes on the income and then distribute it to a beneficiary who may also have to pay taxes on that income on their 1040. Also, if it is a Simple trust – It just Simply HAS to Distribute its Net Income for the year!!

Just be careful – any amount that is a Capital Gain or Loss is allocated back to the Corpus and is NOT included in the DNI deduction allowed for the Estate or Trust.

Hope that helps.

FAR Aug 2012 79
AUD Oct 2012 84
REG Aug 2013 87
BEC Jan 2013 80

[Heidi-O]

@Rache1 A fiduciary is a trust or estate. It's just another name for it. There is someone that has fiduciary responsibilities with a Trust – known as the trustee and with an Estate – known as the executor.

Essentially, DNI is the amount that an Estate or Trust can deduct from their tax return. The Trust has someone that controls the assets (the Corpus) of the trust and either invests them or monitors them (rental activity). Those assets or Corpus make money! (well… hopefully) That money is considered taxable income to the Trust or Estate. BUT, there are expenses involved in monitoring and controlling the estate or trust – attorneys, tax return preparers and the fiduciaries of the Truss or Estates. The Trust and Estates are allowed to Deduct those expenses from their Earned income for that year. As barelystayingsane said, it does not matter if those expenses relate to the corpus of the trust or the investment income of the trust – they are still deductible expenses.

The Distributable Net Income is the Net Income that the Trust made during the year which is the Income (dividends, interests, rental) – Expenses (rental fees, legal fees, tax prepare fees, banker fees) = Distributable Net Income

On the Tax Return for the Trust or Estate (1041), they can deduct the lesser of the DNI (less non taxable income) or the amount distributed to beneficiary (less non taxable income). It is not fair for the Trust to pay taxes on the income and then distribute it to a beneficiary who may also have to pay taxes on that income on their 1040. Also, if it is a Simple trust – It just Simply HAS to Distribute its Net Income for the year!!

Just be careful – any amount that is a Capital Gain or Loss is allocated back to the Corpus and is NOT included in the DNI deduction allowed for the Estate or Trust.

Hope that helps.

FAR Aug 2012 79
AUD Oct 2012 84
REG Aug 2013 87
BEC Jan 2013 80

[barelystayingsane]

@Heidi-O I may be misreading your last paragraph, but that is not quite correct. Only capital gains allocable to corpus are not included in the DNI deduction calculation. Capital gains allocated to income are included in the DNI deduction calculation. The way your last paragraph reads makes it sound like a blanket statement for any and all capital gains. Just wanted to clarify that.

[barelystayingsane]

@Heidi-O I may be misreading your last paragraph, but that is not quite correct. Only capital gains allocable to corpus are not included in the DNI deduction calculation. Capital gains allocated to income are included in the DNI deduction calculation. The way your last paragraph reads makes it sound like a blanket statement for any and all capital gains. Just wanted to clarify that.

[lbi18]

Someone can correct me if I'm wrong, but here are the formulas I have for DNI and Trust Taxable Income.

Trust income (includes ALL capital gains, excludes tax-exempt interest income)

(Trust deductions) – excludes fees allocable to corpus

= Adjusted total income

Adjusted total income

+ Tax-exempt interest income

– Capital gains allocable to corpus

– Fees allocable to corpus

= Distributable Net Income (DNI)

Adjusted Total Income

– (Lesser of: (DNI – tax-exempt income) or (Distributed amount – tax-exempt income)) – this is your income dist. deduction

– Exemption ($100 for complex trust; $300 for simple trust)

= Trust Taxable Income

I feel like the exam wouldn't delve into any crazy specifics with this calculation. It's already confusing enough as it is.

FAR - 85
AUD - 99
REG - 85
BEC - 10/4/13 (Waiting)

Using Becker Self-Study

[lbi18]

Someone can correct me if I'm wrong, but here are the formulas I have for DNI and Trust Taxable Income.

Trust income (includes ALL capital gains, excludes tax-exempt interest income)

(Trust deductions) – excludes fees allocable to corpus

= Adjusted total income

Adjusted total income

+ Tax-exempt interest income

– Capital gains allocable to corpus

– Fees allocable to corpus

= Distributable Net Income (DNI)

Adjusted Total Income

– (Lesser of: (DNI – tax-exempt income) or (Distributed amount – tax-exempt income)) – this is your income dist. deduction

– Exemption ($100 for complex trust; $300 for simple trust)

= Trust Taxable Income

I feel like the exam wouldn't delve into any crazy specifics with this calculation. It's already confusing enough as it is.

FAR - 85
AUD - 99
REG - 85
BEC - 10/4/13 (Waiting)

Using Becker Self-Study

[barelystayingsane]

Famous last words of a CPA candidate: “I feel like the exam wouldn't delve into any crazy specifics with this calculation. It's already confusing enough as it is.”

Haha you should be fine. Personally, I don't think you have to worry about knowing how to calculate adjusted total income and then getting from there to DNI (i.e. just know that for DNI, all fees, including fees allocable for corpus will be deductible).

You may also want to know how to calculate accounting income (aka fiduciary income), since I have seen a couple questions on this pop up in Becker. Like I said up above, the only difference I could see between accounting income and DNI from working the questions was that you just ignored everything (capital gains, fees, etc.) allocated to corpus in your computation.

[barelystayingsane]

Famous last words of a CPA candidate: “I feel like the exam wouldn't delve into any crazy specifics with this calculation. It's already confusing enough as it is.”

Haha you should be fine. Personally, I don't think you have to worry about knowing how to calculate adjusted total income and then getting from there to DNI (i.e. just know that for DNI, all fees, including fees allocable for corpus will be deductible).

You may also want to know how to calculate accounting income (aka fiduciary income), since I have seen a couple questions on this pop up in Becker. Like I said up above, the only difference I could see between accounting income and DNI from working the questions was that you just ignored everything (capital gains, fees, etc.) allocated to corpus in your computation.

[lbi18]

@barelystayingsane

You're right, I'll probably end up getting a crazy SIM on this topic lol – but I just like to think that from the questions I've seen in Becker and Wiley, the fact pattern seems to be relatively straightforward. Then again, the examiners love to throw in tricks of course.

Anyways, yeah, I understand that Fiduciary accounting income ignores everything allocable to corpus, I just didn't include it in my prior response.

I'm so ready for this exam to be behind me. REG has been one tough cookie.

FAR - 85
AUD - 99
REG - 85
BEC - 10/4/13 (Waiting)

Using Becker Self-Study

[lbi18]

@barelystayingsane

You're right, I'll probably end up getting a crazy SIM on this topic lol – but I just like to think that from the questions I've seen in Becker and Wiley, the fact pattern seems to be relatively straightforward. Then again, the examiners love to throw in tricks of course.

Anyways, yeah, I understand that Fiduciary accounting income ignores everything allocable to corpus, I just didn't include it in my prior response.

I'm so ready for this exam to be behind me. REG has been one tough cookie.

FAR - 85
AUD - 99
REG - 85
BEC - 10/4/13 (Waiting)

Using Becker Self-Study

[Heidi-O]

@Barelystayinginsane Sorry for the statement, it was an incorrect statement. It should have said “generally”. 🙁

@Ibi8 I like how you have that formula listed out – it much clearer than what they have in the material! (taking notes…)

FAR Aug 2012 79
AUD Oct 2012 84
REG Aug 2013 87
BEC Jan 2013 80

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