topic Trust depreciation/amortization in Business & farm

Trust depreciation/amortization

Farmgirl123 — Sun, 02 Mar 2025 09:34:41 GMT

I understand depreciation in a trust is more of a cash concept.

Im trying to figure out an example of a difference where the affect is different if the trust keeps the depreciation or it is directly allocated to the beneficiary. How would the taxable income distributed be different and how does this affect the taxes of a trust. This would affect the trust if they were accumulating? Also, if the trust doesn’t allocate the depreciation to the beneficiary doesn’t that decrease the distribution deduction for the trust?

if the trust keeps the depreciation and makes a reserve, the reserve then is distributed to the beneficiaries as principal on sale of the property?

If the trust kept the depreciation, who should be responsible for the recapture when sold?

Re: Trust depreciation/amortization

M-MTax — Sun, 02 Mar 2025 15:08:35 GMT

You should read the following article all the way through:

https://www.journalofaccountancy.com/issues/2010/oct/20102933.html

Also, note that depreciation is essentially an accounting concept; it is a non-cash, phantom, expense.

Re: Trust depreciation/amortization

Farmgirl123 — Mon, 03 Mar 2025 10:16:43 GMT

Thank you!
I have read this article. But I also understand in a trust that depreciation is a little different and that if a trust can keep a reserve, cash on the books is moved to principal for that reserve. There is an actual reserve suppose to be kept. A reserve than owed to the beneficiaries if not used.
Im still curious for the depreciation kept by the trust should the trust not pay the recapture and not the beneficiary for the portion not directly apportioned to the beneficiary?

just trying to figure this all out. I would assume that when the beneficiary got the direct allocation for their portion, they would pay the recapture. It seems to me of the trust kept it, they would pay the recapture?

I don’t see this addressed in any papers I read on the subject.

Re: Trust depreciation/amortization

Farmgirl123 — Mon, 03 Mar 2025 12:53:34 GMT

And I see that they are suppose to transfer from income to principal for the depreciation, amortization/depletion reserve.

I’m just trying to figure out who pays the recapture tax when sold. If the beneficiaries still have to pay it, then reserve in principal should be distributed to them.

Re: Trust depreciation/amortization

M-MTax — Mon, 03 Mar 2025 15:03:27 GMT

Depends upon the trust terms and, if silent, then state law.

If the trust pays any and all tax due on the sale, then a distribution can be made to the beneficiary(ies) tax-free.

The trust could also pass through the gain on the sale via the K-1s which would require the beneficiary(ies) to assume the tax liability.

Re: Trust depreciation/amortization

Farmgirl123 — Mon, 03 Mar 2025 15:13:48 GMT

Truat states distribute as principal.

Re: Trust depreciation/amortization

M-MTax — Mon, 03 Mar 2025 15:30:38 GMT

Understood but note that, regardless of trust terms and state law, either the trust or the beneficiary(ies) will have to pay any and all tax due on income and gain.

Re: Trust depreciation/amortization

Farmgirl123 — Mon, 03 Mar 2025 15:50:04 GMT

Absolutely!!!!
I’m just trying to understand who.
and that reserve should be distributed as principal on sale?

Thank you!

Re: Trust depreciation/amortization

M-MTax — Mon, 03 Mar 2025 16:24:10 GMT

Yes, after any tax due on the sale is paid, the reserve can be distributed as corpus (principal).

Re: Trust depreciation/amortization

Farmgirl123 — Mon, 03 Mar 2025 17:56:52 GMT

I believe you are saying that the recapture would be paid from the principal reserve and then the rest would be distributed as principal?

So appreciate your help!!

Re: Trust depreciation/amortization

M-MTax — Mon, 03 Mar 2025 18:01:49 GMT

Yes, when the recapture results in an additional tax burden (which is almost always).

Re: Trust depreciation/amortization

Farmgirl123 — Fri, 07 Mar 2025 18:18:00 GMT

So I’m curious.
The directly apportioned deductions are not reported on the tax returns for the trust. Just on the k-1?
not even on the 4562? You just keep records in case of audit? Confused. So the schedule would be set at beginning of an estate or trust and you would have to keep scrupulous records because not reported anywhere else but on the k-1?

Thank you!!

Re: Trust depreciation/amortization

M-MTax — Fri, 07 Mar 2025 20:44:28 GMT

The 4562 would be for the first year of depreciation, anyway, so that is irrelevant.

There should be a depreciation schedule somewhere in the program or at least the current and accumulated depreciation on one of the forms you save for your files.

Re: Trust depreciation/amortization

Farmgirl123 — Fri, 07 Mar 2025 21:07:11 GMT

So 4562 filed the first year with the tax return to report the total.

Then nothing else filed after that. Just report directly on the k-1.
If the trust keeps any then it would be filed on the tax return and 4562?

I’m just trying to figure out what is actually filed with the IRS for each directly apportioned or trust keeping some.

Thank you!

Re: Trust depreciation/amortization

M-MTax — Fri, 07 Mar 2025 21:20:01 GMT

The IRS doesn't get those records (you keep them for your files).

What the IRS "sees" is simply the deduction on the trust return (Schedule E) or the K-1 and the corresponding deduction on the beneficiary's tax return.