For the taxable year Trust has the following items of income

For the taxable year, Trust has the following items of income and deduction:

Ordinary Income $50,000

Capital Gains 10,000

Depreciation (§168) (15,000)

The trustee, pursuant to the trust instrument, has established a depreciation reserve of $10,000. Trust is a simple trust for tax purposes. Compute Trust’s distributable net income for the year. Query: who benefits from the $15,000 tax depreciation?

Solution

Capital gain is not distributable income as it is alllocated to principal

Trustee has maintained a depreciation reserve of 10000.

So income of 10000 is set aside. And allowable deduction of depreciation is 15000 - 10000.

Distributable net income = 50000 - 10000 = 40000.

10000 tax depreciation deduction is allowed to trustee.

The balance 5000 is deductible in the hands of beneficiaries.