Page 401 - Small Business IRS Training Guides

Prior Tax Law

An electing small business trust (ESBT) may be a shareholder of an S corporation. Each potential current beneficiary of

an ESBT is considered to be shareholder of the S corporation. Generally, the eligible potential current beneficiaries of
an ESBT include individuals, estates, and certain charitable organizations eligible to hold S corporation stock directly.

A nonresident alien individual may not be a shareholder of an S corporation and therefore may not be a potential current
beneficiary of an ESBT.

The portion of an ESBT which consists of the stock of an S corporation is treated as a separate trust and generally is

taxed on its share of the S corporation’s income at the highest rate of tax imposed on individual taxpayers, except for
capital gains and qualified dividends that are taxed on the preferential tax rates applicable to those types of income. This

income (whether or not distributed by the ESBT) is not taxed to the beneficiaries of the ESBT. If an ESBT is also a grantor
trust, then the grantor trust rules supersede the ESBT rules and the grantor includes the S corporation’s income in his

gross income and the income is taxed at the marginal tax rates applicable to the grantor.

New Tax Provision

A nonresident alien individual may be a potential current beneficiary of an ESBT.

If the grantor portion of an ESBT is owned by a nonresident alien individual, then Proposed Regulations will state the

income that normally would be allocated to the nonresident alien grantor under the grantor trust rules shall be reallocated
to the ESBT portion of the trust and subject to tax at the highest rate of tax imposed on individual taxpayers (except for
capital gains and qualified dividends).

This provision takes effect on January 1, 2018.

73233-102 13541-3 Tax Cuts and Jobs Act