IRS Form 706 (Schedule L) – When dealing with estate taxes in the United States, IRS Form 706 plays a crucial role for executors of estates exceeding certain thresholds. Specifically, Schedule L of Form 706 addresses deductions related to net losses during administration and expenses incurred in administering property not subject to claims. This schedule helps reduce the taxable estate by allowing legitimate deductions, potentially lowering the overall estate tax liability. In this comprehensive guide, we’ll break down what Schedule L entails, how to complete it, and key considerations for accurate filing. Whether you’re an executor, estate planner, or beneficiary, understanding these deductions can make a significant difference in estate tax planning.
What Is IRS Form 706 and Where Does Schedule L Fit In?
IRS Form 706, known as the United States Estate (and Generation-Skipping Transfer) Tax Return, is required for estates of U.S. citizens or residents where the gross estate value exceeds the basic exclusion amount—set at $13,990,000 for decedents dying in 2025. The form calculates the estate tax under Chapter 11 of the Internal Revenue Code and also handles generation-skipping transfer taxes.
Schedule L is one of several schedules attached to Form 706. It specifically focuses on two types of deductions:
- Net losses during administration: Losses from casualties like thefts, fires, storms, or shipwrecks that occur during estate settlement.
- Expenses in administering property not subject to claims: Costs related to managing property that’s part of the gross estate but not available to pay creditors’ claims, such as certain trusts or jointly held assets.
These deductions are entered in Part V (Recapitulation) of Form 706, contributing to the total allowable deductions that reduce the taxable estate. For instance, the total from Part I of Schedule L goes to item 19 (net losses), and from Part II to item 20 (administration expenses). Unlike Schedule J, which covers expenses for property subject to claims, Schedule L is tailored for property outside that scope.
Filing Form 706, including Schedule L, is mandatory if the gross estate plus adjusted taxable gifts exceeds the filing threshold, which for 2025 is aligned with the basic exclusion amount. The form must be filed within nine months of the decedent’s death, with possible extensions.
Purpose of Schedule L in Estate Tax Deductions
The primary goal of Schedule L is to claim deductions under section 2053 of the Internal Revenue Code for administration expenses and losses that preserve or distribute the estate. These must be necessary, allowable under local law, and actually paid (or reasonably estimated and payable) before the IRS assessment period expires.
- Net Losses: This covers uncompensated losses from casualties during administration, helping offset unexpected reductions in estate value.
- Administration Expenses: For property not subject to claims (e.g., pre-death trusts or assets passing outside probate), it includes costs like professional fees or maintenance to ensure proper title transfer and distribution.
Deductions on Schedule L cannot be duplicated on the estate’s income tax return (Form 1041), and they must directly relate to settling the decedent’s interests. If expenses are not yet deductible (e.g., contested claims), use Schedule PC for protective claims without assigning a value on Schedule L.
Who Needs to File Schedule L?
Executors should complete and attach Schedule L to Form 706 if claiming deductions for:
- Casualty losses during estate administration.
- Expenses for administering non-probate property included in the gross estate.
This is common in estates with complex assets like trusts, annuities, or jointly owned property. If the estate’s total value is below the filing threshold, Form 706 (and thus Schedule L) isn’t required. However, for larger estates, accurate use of Schedule L can significantly impact tax calculations. Always consult local laws, as deductibility varies by jurisdiction.
How to Complete Part I: Net Losses During Administration?
Part I of Schedule L is for reporting net losses from casualties occurring during estate settlement. Here’s a step-by-step guide:
- Itemize Losses: List each loss in detail, including the item number, description (e.g., “Theft of jewelry from storage facility”), and net amount after insurance or reimbursements.
- Calculate Totals: Sum the losses in column (iii). If more space is needed, use Schedule W (Continuation Schedule) and carry totals to line 2.
- Add Attachments: Include totals from any attached Schedule W on line 3, then compute the grand total on line 4.
- Transfer to Form 706: Enter the line 4 amount on Part V, item 19 of Form 706.
Key Rules:
- Only deduct losses not claimed on Form 1041.
- Exclude market value depreciations or alternate valuation adjustments under section 2032.
- Provide supporting details like cause of loss and property identification (reference other schedules where the asset appears in the gross estate).
| Line | Description | Notes |
|---|---|---|
| 1- (items) | Individual net losses | Net of reimbursements; detail required. |
| 2 | Subtotal from this schedule | Sum of column (iii). |
| 3 | Totals from attachments | From Schedule W or statements. |
| 4 | Grand total | Transfer to Form 706, Part V, item 19. |
How to Complete Part II: Expenses Incurred in Administering Property Not Subject to Claims?
Part II focuses on expenses for managing non-claim property. Follow these steps:
- Itemize Expenses: For each item, provide the number, description (e.g., “Attorney fees for trust administration”), status (estimated, agreed, or paid), and amount.
- Calculate Totals: Sum column (iii) on line 6. Use Schedule W for overflow and add those totals on line 7.
- Grand Total: Compute on line 8 and transfer to Form 706, Part V, item 20.
Deductible Expenses Examples (per Regulations section 20.2053-8(d)):
- Accountant and attorney fees.
- Interest on estate obligations (excluding penalties).
- Court costs, storage, and maintenance fees.
- Selling expenses if necessary for paying debts or preserving the estate.
Non-Deductible Items:
- Trustee commissions (not on Schedule L).
- Beneficiary litigation costs.
- Expenses on behalf of transferees.
- Section 6166 installment interest.
Expenses must be paid before the section 6501 limitations period ends, and estimates require affidavits if unpaid.
| Line | Description | Notes |
|---|---|---|
| 5- (items) | Individual expenses | Indicate status; detail payee and nature. |
| 6 | Subtotal from this schedule | Sum of column (iii). |
| 7 | Totals from attachments | From Schedule W. |
| 8 | Grand total | Transfer to Form 706, Part V, item 20. |
Tips for Filing Schedule L and Avoiding Common Mistakes
- Gather Documentation: Retain receipts, vouchers, and affidavits for IRS review.
- Use Estimates Wisely: Only for verifiable, payable amounts; support with perjury-sworn statements.
- Avoid Duplications: Check against Form 1041 to prevent double-dipping.
- Attach Properly: Include Schedule L with Form 706; use Schedule W for extras.
- Common Pitfalls: Deducting non-necessary expenses, forgetting to identify property, or missing the nine-month filing deadline.
For the latest form, download Schedule L from the IRS website: https://www.irs.gov/pub/irs-pdf/f706sl.pdf.
FAQs About IRS Form 706 Schedule L
What if expenses are unpaid at filing time?
Use estimates if reasonably certain and payable; file affidavits and amend later if needed.
Can I deduct losses from market fluctuations?
No—only casualty losses during administration, net of insurance.
Is Schedule L required for all estates?
Only if claiming these specific deductions and filing Form 706.
How does Schedule L affect estate taxes?
It reduces the taxable estate, potentially lowering tax via deductions under section 2053.
Where can I find more help?
Refer to IRS Instructions for Form 706 or consult a tax professional.
Conclusion
Mastering IRS Form 706 Schedule L ensures you maximize allowable deductions for net losses during administration and expenses in administering property not subject to claims, optimizing your estate tax return. Always rely on official IRS guidance and consider professional advice for complex estates. By staying compliant, you can efficiently navigate estate taxes and protect beneficiaries’ interests. For the most current details, visit IRS.gov/Form706.