Hello,

 

you wrote.....

 

 

 

Let's look at your first and last example before we consider the NAIC Low Cost Plan.

 

As far as commissions paid to Ameritrade are concerned, IRS Publication #550 - Investment Income and Expenses clearly states " You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. You must add the fee to the cost of the property."

 

Expenses associated with the Home Depot direct purchase plan may well depend on the nature of the charge.   If the commission charge is directly related to the purchase or sale of stock the fee should be added to the cost basis of that stock.   But what about other fees and expenses associated with some Automatic investment service and dividend reinvestment plans.  Again, referring to IRS Pub #550, it states.....

 

"a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Through that service, cash dividends are reinvested in more shares of stock, after the bank deducts a service charge.

And finally, the treatment of the $7 fee associated with NAIC's Low Cost Plan appears to fall into a gray area of the tax code.   Again let's look at two quotes from IRS Publication #550.

" If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Deduct the charges in the year you pay them."

"The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees."

In some ways, both quotes seem to apply.  In other ways, neither quote applies.  Thus the gray area.    Some time ago I posed this same question to Tom O'Hara, Chairman of NAIC.   He responded that it was his interpretation that the $7 fee should be treated as an expense, however, he provided no documentation to substantiate that interpretation.

Therefore, I leave it up to you to decide which treatment is appropriate for your club.   The dollar amounts are small and, assuming you remain consistent in your treatment, I doubt that the IRS would ever make an issue of it one way or the other.

I have noticed that "commissions" are added to the cost of the stock in the valuation but "fees" are not.  Which has the better tax advantage?

 

Commissions are added to the cost basis, eventually reducing the amount of capital gains realized when an investment is sold.   Fees are treated as a deductible expense and are deducted in the year that they are realized.   Which has a better tax advantage will depend on the tax situation of each individual member of your club.  Those that can take advantage of additional miscellaneous deductions might prefer the treatment as a fee, reducing current taxable income.   Those who do not meet the 2% AGI threshold and therefore cannot take advantage of additional miscellaneous deductions might prefer to instead have lower capital gains in the future.

 

Thanks for using bivio!

 

Jerry Dressel
St.Louis, Missouri
Trez_Talk@bivio.com

 

Disclaimer: the statements above are opinions of the author and are not official statements from either bivio or the IRS. These statements are not intended to replace professional tax or accounting advice. When in doubt, follow the advice of your local tax advisor or accountant who is familiar with your particular circumstances.