Overview

Main Menu Name: Estate/Trust

This calculation handles Estates and Non-Grantor Trusts, which can serve in two roles: (1) owner of an interest in one or more RPEs ("Taxpayer" role), and (2) "Relevant Passthrough Entity itself that distributes income to one or more beneficiaries, all of whom serve in a "Taxpayer" role based on their "ownership" interest in the Estate or Non-Grantor Trust. The estate/trust and beneficiaries share in the §199A deduction, in proportion to the DNI kept by the estate/trust and the DNI distributed to beneficiaries.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

In the world of §199A, estates and non-grantor trusts play a unique dual role:

1. Individual that can be the recipient of income from passthrough entities, just like a person filing as married/joint, married/separate, etc. The filing status (Estate or Trust) uses the "Other" category (2024 amounts)
   
   
   1. 1. §199A threshold: $191,950
      2. phase-in range:    $ 50,000
      3. top of Zone #2:    $241,950
         
         
2. Relevant Passthrough Entity (RPE)that can pass through to its beneficiaries some portion of the income that the estate or trust itself has received from other RPEs (via S Corporation or partnership K-1s or Form 1040 Schedules C, E, or F that it receives as the "sole proprietor" of the business previously owned by the decedent or distributed to the trust.

The IRS has finally provided some guidance on how the §199A deduction is determined for an estate or trust via Form 1041:

1. Line 15a (Other deductions):eventually report the estate/trust §199A deduction on this line, but not yet.
   
   
2. Line 21 (Income distribution deduction):the §199A Final Regulations reversed the position of the Proposed Regulations, and now allow the estate/trust income distribution deduction to reduce the income to be used for purposes of the estate/trust 20% limitation on taxable income.
   
   
3. Form 1041, Line 22, Modified Taxable Income:
   
   
   1. 1. start with Line 22 Taxable Income
      2. less: Line 4 (Net capital gain
      3. less: Line 2(b)(2) Qualified dividends
      4. hold: §199A deduction: don't subtract yet (because you don't know it)
      5. hold: Line 18 (Estate tax deduction): awaiting IRS guidance
      6. hold: Line 19 (Exemption): awaiting IRS guidance
         
         
4. Modified Line 22 (Taxable Income) x 20%: estate/trust limitation
   
   
5. RPE Modified Taxable Income x 20%
   
   
6. Wage and Capital test: Apply as applicable to Item #5
   
   
7. SSTBs:If any of the RPEs are SSTBs, phase that income out in Zone #2 (via the applicable percentage) or don't count it at all if the estate/trust's Modified Taxable Income puts it into Zone #3 ($207,500 or higher)
   
   
8. REIT x 20%
   
   
9. PTP x 20%
   
   
10. RPE Combined Qualified Business Income Amount: Add #7, #8, and #9
    
    
11. §199A deduction: lesser of #4 or #10
    
    
12. Estate/trust tax calculated as follows:
    
    
    1. start with estate/trust Modified Taxable Income (#3 above)
    2. plus: Line 4 (Net capital gain
    3. plus: Line 2(b)(2) Qualified dividends
    4. less: §199A deduction: you now know it
    5. less: Line 18 (Estate tax deduction): if not reflected above in #3
    6. less: Line 19 (Exemption): if not reflected above in #3
       
       
13. Estate/Trust True Taxable Income: result of #12
    
    
14. Estate/Trust Tax: Compute tax on #13 using tax table applicable to estates and trusts

Beneficiary K-1s

Per the final 2018 instructions for Form 1041 and Schedule K-1, the estate/trust must report in Block 14, Code I, each beneficiary's pro-rata share of the following items relating to the §199A deduction:

1. QBI (RPE Total Taxable Income)*
2. W-2 Wages
3. UBIA
4. REIT Income
5. PTP Income

* QBI: It would appear that this QBI would be "Modified RPE Total Taxable Income", with capital losses already added back in and capital gains, dividends, and interest already removed (in order to compute the first 20% limitation at the beneficiary 1040 level). Presumably, the income from RPE to estate/trust to beneficiaries has been distributed without modification on Lines 1-8 of the K-1, so that the beneficiary does not need to worry about reversing the modifications that were made (in the estate/trust) to get to QBI/Modified Total Taxable Income.

Getting Started

Entering Data

1. Tax Year:  Enter the year for which the federal income tax is being calculated. The program handles from year 2018 onwards. For future years, the program will default to the current year.
   
   
2. Qualified Business Income (QBI):  Is determined for each qualified trade or business of the taxpayer. For any taxable year, qualified business income means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. The determination of qualified items of income, gain, deduction, and loss takes into account these items only to the extent included or allowed in the determination of taxable income for the year. For example, if in a taxable year, a qualified business has $100,000 of ordinary income from inventory sales, and makes an expenditure of $25,000 that is to required to be capitalized and amortized over 5 years under applicable tax rules, the qualified business income is $100,000 minus $5,000 (current-year ordinary amortization deduction), or $95,000. The qualified business income is not reduced by the entire amount of the capital expenditure, only by the amount deductible in determining taxable income for the year. If the net amount of qualified business income from all qualified trade or businesses during the year is a loss, it is carried forward as a loss from a qualified trade or business in the next taxable year.
   
   
3. W-2 Wages Paid:  Enter the amount of W-2 Wages paid to employees of the business. Include W-2 Wages paid to shareholder- employees of an S corporation. Do not include guaranteed payments to partners of a partnership. Sole proprietors are not paid W-2 Wages from their own sole proprietorship. W-2 Wages refers to the amounts described in paragraphs(3) and (8) of §6051(a) which are paid by a person with respect to employment of employees by the person during the calendar year ending during that taxable year. §6051(a) is "the total amount of wages as defined in §3401(a) " and §6051(a)(8) is "the total of amount of elective deferrals. §3401(a) provides that generally "wages" means all remuneration for services performed by an employee for his employer
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4. Unadjusted Basis (UBIA):  Tangible property of a character subject to depreciation that is held by, and available for use in, the qualified trade or business at the close of the taxable year, and which is used in the production of qualified business income, and for which the depreciable period has not ended before the close of the taxable year. The depreciable period with respect to qualified property of a taxpayer means the period beginning on the date the property is first placed in service by the taxpayer and ending on the later of (a) the date 10 years after that date, or (b) the last day of the last full year in the applicable recovery period that would apply to the property under §168.
   
   
5. REIT Dividends:  Do not include any portion of a dividend received from a REIT that is a capital gain dividend [defined in §857(b)(3)] or a qualified dividend [defined in §1(h)(11)].
   
   
6. Pub. Tr. Pship Inc. (Publicly Traded Partnership, or PTP):  Enter the publicly traded partnership income, which is the sum of the (a) net amount of the taxpayer's allocable share of each qualified item of income, gain, deduction, and loss (that are effectively connected with U.S. trade or business and are included or allowed in determining taxable income for the taxable year and do not constitute excepted enumerated investment-type income, and not including the taxpayer's reasonable compensation, guaranteed payments for service or §707(a) payments for services) from a publicly traded partnership not treated as a corporation, and (b) gain recognized by the taxpayer on disposition of its interest in the partnership that is treated as ordinary income.
   
   
7. Distributable Net Income (DNI):  Enter the estate or trust's DNI for the year. See IRS Form 1041, Schedule B. If the trust's DNI is zero, all W-2 Wages and qualified property unadjusted basis is allocated to the estate or trust and none is allocated to the trust beneficiaries, so there is no need to continue with the calculation in that case.
   
   
8. Number of Beneficiaries:  Enter the number of beneficiaries for the estate or trust.
   
   
9. Total DNI Distributed to All Trust Beneficiaries:  Enter the total DNI distributed to all beneficiaries.
   
   
10. Equal Shares for DNI Distrs. to Benef:  Enter "Yes" if the estate or trust distributes its total DNI for the year to all estate or trust beneficiaries in equal shares.

Results

This screen displays the allocation between estate/trust and all beneficiaries of the following items related to §199A:

1. QBI
2. W-2 Wages
3. UBIA
4. REIT Dividends
5. PTP Income

This allocation is based entirely on the portion of DNI that is allocated to beneficiaries and the portion that is retained by the estate or trust. Behind the scenes, a percentage is computed for each.

If you answer "Yes" to "Equal Shares for DNI Distrs. to Benef?", then the screen will divide the beneficiary percentage by the number of beneficiaries (maximum 25 beneficiaries). It will then apply this percentage against each of the above items to determine each beneficiary's dollar share.

If you answer "No" to "Equal Shares for DNI Distrs. to Benef?", an "Edit" button will appear. This will allow you to enter varying dollar shares of DNI for each beneficiary. It will then apply the varying percentages of beneficiary DNI against each of the above items to determine each beneficiary's dollar share.

In both cases, the portion of each item not allocated to beneficiaries will be shown as retained by the estate or trust.