IRS Issues Final Regulations on Electing Small Business Trusts

News from RWHSG

IRS Issues Final Regulations on Electing Small Business Trusts

Posted by Kim Chen on September 6th, 2019

: Thanks to the Tax Cuts and Jobs Act (TCJA), a Nonresident Alien (NRA) is now permitted to be a potential current beneficiary of an Electing Small Business Trust (ESBT) [IRC Sec. 1361(c)(2)(B)(v)]. Recently, the IRS issued final regulations (TD 9868) that ensure S corporation income will continue to be subject to U.S. federal income tax when an NRA is a deemed owner of an ESBT. Specifically, the regulations modify the allocation rules under Reg. 1.641(c)-1 to require that the S corporation income of the ESBT be included in the S portion of the ESBT if that income otherwise would have been allocated to an NRA deemed owner under the grantor trust rules. The final regulations, which adopt without change rules proposed by the IRS in April 2019, apply to all ESBTs after 12/31/17 and are effective 6/18/19. Regs. 1.641(c)-1 and 1.1361-1.