Magazine article The CPA Journal

IRS Eases Process to Convert S Corp Trusts

Magazine article The CPA Journal

IRS Eases Process to Convert S Corp Trusts

Article excerpt

The IRS issued a revenue procedure designed to ease the task of converting trusts back and forth between qualified subchapter S trust (QSST) status and an electing small business trust (ESBT) status.

As a general rule, trusts cannot qualifyto own S corporation stock, but there are two exceptions. A trust can elect to be a QSST if it has only one beneficial owner, all corpus distributions made during the life of the beneficiary are made to the beneficiary alone, and all income is distributed to the beneficiary.

An ESBT may have more than one current income beneficiary, but all beneficiaries must be individuals, estates, or certain tax-exempt entities, and no interest in the trust may be acquired by purchase. The advantage of an ESBT is that S corporation income and distributions may be sprinkled among beneficiaries. The disadvantage of an ESBT is that the pass-through income from the S corporation is taxed at the maximum individual rates. …

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