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recovered amount was excluded from

transactions between a taxpayer and a

net investment income and excluded

gross income by reason of section 111.

pass-through entity in which the taxpayer

income, you may use any reasonable

owns a direct or indirect interest, or

method to determine that portion of the

There are 2 exceptions to including

between certain pass-through entities.

deduction that’s properly allocable to net

recovered amounts in net investment

The section 469 self-charged interest

investment income. The 3 items that may

income. The 2 exceptions apply the tax

rules apply only to items of interest income

be allocated between net investment

benefit rule of section 111 within the NIIT

and interest expense that are recognized

income and excluded income are:

system, and therefore operate

in the same tax year. The self-charged

State, local, and foreign income taxes if

independently of the application of section

interest rules:

properly deducted on your return when

111 for IRC chapter 1 purposes. First,

Treat certain interest income resulting

calculating your U.S. regular income tax.

properly allocable deductions aren’t

from these lending transactions as

All ordinary and necessary expenses

reduced in the year of the recovery if the

passive activity income,

paid or incurred during the tax year to

amount deducted in the prior year didn’t

Treat certain deductions for interest

determine, collect, or obtain a refund of

reduce the amount of section 1411

expense that are properly allocable to the

any tax owed if properly deducted on your

liability. Second, properly allocable

interest income as passive activity

return when calculating your U.S. regular

deductions aren’t reduced in the year of

deductions, and

income tax.

the recovery if the amount deducted in the

Allocate the passive activity gross

Amounts paid or incurred by the

prior year is included in net investment

income and passive activity deductions

fiduciary of an estate or trust on account of

income.

resulting from this treatment among the

administration expenses, including

taxpayer's activities.

fiduciaries' fees and expenses of litigation,

Note. The total amount of recovery

which are ordinary and necessary in

reported on Form 8960, line 7, can’t

The rules for computing net investment

connection with the performance of the

exceed the total amount of properly

income adopt a similar rule for

duties of administration if properly

allocable deductions for the year.

self-charged interest. See Regulations

deducted on your return when calculating

section 1.1411-4(g)(5). Include on line 7

If the recovered amount relates to

your U.S. regular income tax.

(as a negative amount) the amount of

a deduction taken in a tax year

TIP

interest income you received that’s equal

If you have more than one of the

beginning before 2013, none of

to the amount of interest income that

deductions described above, you may use

the recovery is included in net investment

would’ve been considered passive income

a different method of allocation for each

income in the year of recovery.

under the self-charged interest rules

one. The reasonable method of allocation

(Regulations section 1.469-7) had the

may differ from year to year.

If the recovered amount relates to

nonpassive activity been considered a

Examples of reasonable methods of

a deduction taken in a tax year

TIP

passive activity.

beginning after 2012 and you

allocation include, but aren’t limited to, an

weren’t subject to the NIIT because your

allocation of the deduction based on the

Note. This rule doesn’t apply to interest

MAGI (see

Line 13—Modified Adjusted

ratio of the amount of a taxpayer's gross

received on loans made to a trade or

Gross Income

(MAGI), in these

investment income (Form 8960, line 8) to

business engaged in the trading of

the amount of the taxpayer's AGI (Form

instructions), was below the applicable

financial instruments or commodities.

threshold on line 14, then none of the

1040, line 38). In the case of an estate or

recovery is included in net investment

trust, an allocation of a deduction under

Note. Don’t include any adjustment for

income in the year of recovery. However,

Regulations section 1.652(b)-3(b), and in

interest income on line 7 (as a negative

this rule doesn’t apply if you incurred an

the case of ESBT, Regulations section

amount) if the corresponding interest

1.641(c)-1(h), is also a reasonable

NOL in the year of the deduction, and a

deduction is also taken into account in

portion of your NOL is a section 1411

method.

determining your self-employment income

NOL.

that’s subject to tax under section 1401(b).

Note. If an estate or trust allocates

expenses for regular income tax purposes

If the recovered amount is

Part II—Investment

under Regulations section 1.652(b)-3(b)

included in net investment income

TIP

Expenses Allocable to

or 1.641(c)-1(h), any deviation from that

on lines 1–6, none of the recovery

allocation may not be a reasonable

is included in net investment income on

Investment Income and

allocation method for NIIT purposes.

line 7.

Modifications

Items not deductible in calculating net

See Regulations section 1.1411-4(g)(2)

Investment Expenses

investment income. Unless a deduction

for more information and examples. See

is specifically identified as properly

Line 7—Deduction Recoveries

Part II of Form 8960 includes deductions

allocable to net investment income in the

Worksheet, in these instructions, to

and modifications to net investment

section 1411 regulations, or in

determine the amount of any recovery to

income that aren’t otherwise included in

supplemental guidance issued by the IRS

include on line 7.

Part I. Generally, expenses associated

in the Internal Revenue Bulletin, the

with a passive activity trade or business,

In the case of multiple recoveries

deduction isn’t permitted.

or the trade or business of trading in

in a single year, complete this

TIP

financial instruments or commodities

worksheet for each recovery. If

Line 9a—Investment Interest

conducted through a pass-through entity

multiple recoveries relate to a single

are already included on line 4a or on

Expense

deduction year, the amount reported on

line 5a. Part II is used to report deductions

lines 8 and 9 of the first recovery

Enter on Form 8960, line 9a, interest

that are, predominately, itemized

worksheet will become lines 7 and 10,

expense you paid or accrued during the

deductions. For more information on what

respectively, on the second recovery

tax year deducted on Schedule A (Form

constitutes properly allocable deductions,

worksheet.

1040), line 14. Estates and trusts enter the

see Regulations sections 1.1411-4(f)-(g).

amount from Form 4952, line 8 (if not

Self-charged interest. The self-charged

Reasonable method allocations. To

required to file Form 4952, use the form as

interest rules under section 469 (passive

the extent that you have a properly

a worksheet). For individuals filing a Form

activity loss limitation) apply to lending

allocable deduction that’s allocable to both

1040NR, include only the amount of

Instructions for Form 8960 (2017)

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Instructions For Form 8960 - Net Investment Income Tax - Individuals, Estates, And Trusts - 2017 Page 12

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