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Capitalization of portfolio management fees.

High net worth individuals who incur significant portfolio management fees may be able to avoid potential disallowance of the expenses by capitalizing the fees and deducting the costs as assets are sold.

Many high net worth individuals pay significant portfolio management fees based on the value of the assets under management. Depending on the individual's adjusted gross income (AGI) level and other miscellaneous itemized deductions, these expenses may be disallowed due to the 2% of AGI floor. These fees may, however, be capitalized as carrying charges under Sec. 266. This would move the expenditures "above the line" as cost basis, to be deducted on Schedule D as the portfolio assets are sold.

Sec. 266 and Regs. Sec. 1.266-1(c) provide for an election to capitalize taxes and carrying charges incurred on certain real and personal property. Regs. Sec. 1.266-(1)(b)(iv) further states that the section applies to any other taxes and carrying charges with respect to property otherwise deductible that, in the IRS's opinion and under sound accounting principles, are chargeable to a capital account. Based on this analysis, it appears that the following criteria exist for the capitalization of portfolio management fees under Sec. 266:

* The expenditure must be deemed a carrying charge. * The carrying charge has to be incurred with respect to property. * The expenditure must be otherwise deductible. * The expenditure must be chargeable to a capital account under sound accounting principles.
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Author:Lottig, Dale
Publication:The Tax Adviser
Article Type:Brief Article
Date:Mar 1, 1994
Words:238
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