Following amendments to the Tax Cuts and Jobs Act, a number of “miscellaneous itemized deductions subject to the two-percent floor” have been suspended, including investment costs and fees.
This means US taxpayers will no longer be able to deduct investment costs on Schedule A starting this year. On the plus side, the act has retained “other miscellaneous deductions” such as short-selling expenses like stock borrow fees, which are not subject to the two-percent floor.
This means individual taxpayers are still entitled to deduct investment interest costs and other expenses as calculated on Form 4952 up to net investment income.
After the amendments, the act features a full list of suspended miscellaneous itemized deductions, such as costs for the production or collection of income.
These exclude short-selling expenses. Section 67(b) also excludes deductions permissible in connection with personal property used in a short sale.
Because investment fees and costs cannot be deducted any more, some accountants might consider capitalizing investment management fees as a carrying charge to subtract them from capital gains and losses. Unfortunately, this isn’t a viable approach. According to the IRS, investment management fees cannot be capitalized under Section 266 because they are less transaction- than management-related.
As borrow fees are transactional, short-sellers are likely to be able to capitalize them under Section 266. However, deducting these short-sale costs on Schedule A as “Other Miscellaneous Deductions” is a better idea. Following amendments, the deduction has full impact on lowering taxable income.