Deductions You Can Take For Net Investment Income Tax Purposes

Lewis Saret for Forbes writes: Generally, unless specifically provided else­where by the Final Regulations, only properly allocable deductions contained in Reg. §1.1411-4(f) may be taken into account by taxpayers in determining their NII. Additionally, taxpayers should be aware that any deductions provided for in Reg. §1.1411-4(f) that exceed gross income and net gain cannot be taken into account when determining NII in any other tax year except as otherwise allowed by Code Chapter 1.

Properly Allocable Deductions

1.    Deductions allocable to gross income from rents and royalties. Deductions described in Code Sec. 62(a)(4) (i.e.,deductions attributable to rents and royalties) allo­cable to rents and royalties included in NII are taken into account in determining NII.

2.    Deductions allocable to gross income from trader trades or businesses. Trade or business expense deductions described in Code Sec. 62(a)(1) allocable to income from a trade or business described in Reg. §1.1411-5 (i.e., passive activities with respect to the taxpayer and/or trade or business of trading in financial instruments or commodities) are taken into account in determining NII to the extent the deductions are not taken into account in determining self-employment income within the meaning of Reg. §1.1411-9.

3.    Penalties on early withdrawal of savings. Penalty amounts forfeited to certain financial institutions as a penalty for premature withdrawal of funds from certain accounts, such as time savings account, certificate of deposit, or similar deposits are taken into account in determining NII.

4.    NOLs. The total Code Sec. 1411 NOL amount of an NOL deduction allowed under Code Sec. 172 is allowed as a properly allocable deduction in determining NII. For this purpose, the total Code Sec. 1411 NOL amount of an NOL deduction is calculated as follows: [snip]  The article continues @ Forbes, click here to continue reading.....