Page 408 - Small Business IRS Training Guides

Prior Tax Law

An Electing Small Business Trust (ESBT) may be a shareholder of an S corporation. The portion of an ESBT that consists

of the stock of an S corporation (S portion) 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. This income (whether or not distributed

by the ESBT) is not taxed to the beneficiaries of the ESBT. In addition to non-separately computed income or loss, an
S corporation reports to its shareholders their pro rata share of certain separately stated items of income, loss, deduction,

and credit. For this purpose, charitable contributions (as defined in §170(c)) of an S corporation are separately stated and
deducted by the shareholder.

The treatment of a charitable contribution passed through by an S corporation depends on the shareholder. Because an

ESBT is a trust, the deduction for charitable contributions applicable to trusts, rather than the deduction applicable to
individuals, applies to the trust. Generally, a trust is allowed a charitable contribution deduction for amounts of gross

income, without limitation, which pursuant to the terms of the governing instrument are paid for a charitable purpose. No
carryover of excess contributions is allowed. An individual is allowed a charitable contribution deduction limited to certain

percentages of adjusted gross income (AGI) generally with a five-year carryforward of amounts in excess of this limitation.

New Tax Provision

The charitable contribution deduction of the S portion of an ESBT is not determined by the rules generally applicable to

trusts but rather by the rules applicable to individuals. Thus, the percentage limitations and carryforward provisions
applicable to individuals apply to charitable contributions made by the S portion of an ESBT.

The provision does not affect the taxable S portion of an ESBT that is a grantor trust and therefore is taxed under the

grantor trust rules.

This provision applies to taxable years beginning after December 31, 2017.

73233-102 13542-3 Tax Cuts and Jobs Act