Electing Small Business Trusts (ESBTs)

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Electing Small Business Trusts (ESBTs)

Special rules apply when figuring the tax on the S portion of an ESBT. The S portion of an ESBT is the portion of the trust that consists of stock in one or more S corporations and is not treated as a grantor type trust. The tax on the S portion:

  • Must be figured separately from the tax on the remainder of the ESBT (if any) and attached to the return,

  • Is entered to the left of the Schedule G, line 7, entry space preceded by “Sec. 641(c),” and

  • Is included in the total tax on Schedule G, line 7.

The tax on the remainder (non-S portion) of the ESBT is figured in the normal manner on Form 1041.

Tax computation attachment. Attach to the return the tax computation for the S portion of the ESBT.

To compute the tax on the S portion:

  • Treat that portion of the ESBT as if it were a separate trust;

  • Include only the income, losses, deductions, and credits allocated to the ESBT as an S corporation shareholder and gain or loss from the disposition of S corporation stock;

  • Aggregate items of income, losses, deductions, and credits allocated to the ESBT as an S corporation shareholder if the S portion of the ESBT has stock in more than one S corporation;

  • Deduct state and local income taxes and administrative expenses directly related to the S portion or allocated to the S portion if the allocation is reasonable in light of all the circumstances;

  • Deduct interest expense paid or accrued on indebtedness incurred to acquire stock in an S corporation;

  • Do not claim a deduction for capital losses in excess of capital gains;

  • Do not claim an income distribution deduction or an exemption amount;

  • Do not claim an exemption amount in figuring the AMT; and

  • Do not use the tax rate schedule to figure the tax. The tax is 35% of the S portion's taxable income except in figuring the maximum tax on qualified dividends and capital gains.

For additional information, see Regulations section 1.641(c)-1.

Other information. When figuring the tax and DNI on the remaining (non-S) portion of the trust, disregard the S corporation items.

Do not apportion to the beneficiaries any of the S corporation items.

If the ESBT consists entirely of stock in one or more S corporations, do not make any entries on lines 1–22
of page 1. Instead:

  • Complete the entity portion;

  • Follow the instructions above for figuring the tax on the S corporation items;

  • Carry the tax from line 7 of Schedule G to line 23 on page 1; and

  • Complete the rest of the return.

The grantor portion (if any) of an ESBT will follow the rules discussed under Grantor Type Trusts, earlier.