Electing Small Business Trusts (ESBT)
Electing Small Business Trusts
Electing Small Business Trusts (ESBT) were created by Congress in the Small Business Job Protection Act of 1996 (P.L. 104-188). For years beginning after 1996, an ESBT may qualify as an S corporation stockholder even if the trustee does not distribute all of the trust's income annually to its beneficiaries. The portion of an ESBT that consists of the S corporation stock is treated as a separate trust for tax purposes (but not for trust accounting purposes), and the S corporation income is taxed directly to that portion of the trust even if some or all of that income is distributed to the beneficiaries.
Special rules apply when figuring the tax on the S portion of an electing small business trust (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.
Form 1041 Electing Small Business Trusts - General Information
S portion of the ESBT:
- The tax must be figured separately from the tax on the remainder of the ESBT (if any) and attached to the return.
- The tax is entered to the left of the Schedule G, line 7, entry space preceded by "Sec. 641(c)"
- The tax is included in the total tax on Schedule G, line 7.
- Treat the S 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 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
- 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 deduct interest on money borrowed by the trust to buy S corporation stock
- Do not claim an exemption amount in figuring the alternative minimum tax
- 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.
- 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 of Form 1041. Instead:
- Complete the entity portion
- Figure the tax on the S corporation items
- Carry the tax from line 7 of Schedule G to line 23 on page 1 of Form 1041
- Complete the rest of the return
Non-S portion of the ESBT:
- The tax on the remainder (non-S portion) of the ESBT is figured in the normal manner on Form 1041.
Who Must File
Form 1041 - U.S. Income Tax Return for Estates and Trusts
- Any taxable income, OR
- Gross Income of $600 or more, OR
- A nonresident alien beneficiary
When to File
- 15th day of the 4th month after the end of the tax year
- First Extension - Form 8736, 3 month automatic extension
- Second Extension - Form 8800, 3 month additional extension
Generally follows individual rules:
- If you expect to owe, after subtracting any withholding and credits, at least $1,000 in tax
- Safe Harbors of: 90% of current year's tax, OR 100/110% of last year's tax.
- Check the Amended Return box on the front of Form 1041
- Check the Final Return box on the front of Form 1041
- There is no deduction for exemption