TRUST 2003-01 - Ohio law imposes Ohio income tax on trusts
for taxable years beginning in 2002, 2003, and 2004 -
April 14, 2003
Ohio law imposes Ohio income tax on trusts for taxable years
beginning in 2002, 2003, and 2004.
Set forth below are frequently asked questions and our
answers. NOTE: because of changes made by House Bill 675,
124th General Assembly, effective December 13,
2002, this information release replaces the July, 2002
information release and the September 12, 2002 information
Legend: "IRC" = Internal Revenue Code; "ORC" = Ohio Revised
1. Q. Where can I obtain the forms?
A. The annual fiduciary income tax return (Ohio form IT-1041)
and the quarterly estimated fiduciary income tax coupons
(Ohio form IT-1041ES) are available via the Department’s home
page, http://tax.ohio.gov/ (click on "forms" appearing at the
top margin of the Department’s home page).
2. Q. What trusts are subject to the tax?
A. Generally, each trust which must file the IRS fiduciary
income tax return (IRS form 1041) must also file the Ohio
fiduciary income tax return.
Ohio law expressly exempts from the filing and payment
requirement the following types of trusts: grantor trusts,
charitable remainder trusts, qualified funeral trusts,
endowment and perpetual care trusts, qualified settlement
trusts and funds, designated settlement trusts and funds, and
The trust need not file if the trust meets all
the following three requirements:* The trust has no federal
taxable income on account of the trust’s having distributed
all income and all gain;* The trust is not an electing small
business trust (often such trusts will pay federal income
tax, but the income attributable to the ESBT’s investment in
an S corporation is not shown as federal taxable income on
the IRS form 1041); and
* There are no adjustments required by ORC section 5747.01(S)
which would result in Ohio taxable income (example: the trust
has invested in bonds issued by another state, and the trust
has not distributed the interest income from such
investments. This income would not be part of federal taxable
income but would be an ORC section 5747.01(S) adjustment
resulting in Ohio taxable income).
An inter vivos irrevocable trust does not have to file or pay
if (i) for the entire taxable year of the trust the trust has
no potential current beneficiaries, as defined in IRC section
1361(e)(2), who are Ohio residents for purposes of Ohio
individual income tax law, and (ii) the trust has recognized
only modified nonbusiness income (see Q & A # 16).
3. Q. For the current taxable year, must a trust file
Ohio form IT-1041, the estimated Ohio income tax coupons, if
the trust will have no income for the current taxable year on
account of the trust's distributing all current year income
and all current year gain?
A. No. A trust that will have no current year Ohio taxable
income (see Q & A above), should not file Ohio form
IT-1041ES, the estimated Ohio income tax coupons. Trusts
should file the estimated Ohio income tax coupons only if
current year estimated Ohio income tax is due.
4. Q. For purposes of making estimated Ohio income
tax payments and benefiting from "safe harbor" protection
from the interest penalty imposed under ORC section 5747.09,
can trusts pay the estimates based upon "last year's
A. Yes. Please note that for the taxable year beginning in
2002, the safe-harbor for tax paid for the prior year must be
based upon the tax the trust would have owed if the trust was
subject to Ohio income tax for the taxable year beginning in
5. Q. Can trusts pay the estimated Ohio income tax
based upon the federal annualize rules?
6. Q. Must expenses related to income which ORC
section 5747.01(S) exempts from Ohio income tax be netted
when calculating the fiduciary’s deductions for the matching
7. Q. How should trusts handle depreciation? Some
states allocate depreciation only against the principal
(corpus) while other states allocate the depreciation expense
to the income, thereby lowering the tax.
A. The trust must follow the rules for calculating the
trust’s federal taxable income (the "starting point" for
calculating the trust’s Ohio modified taxable income). Note:
Ohio law requires special adjustments for taxpayers claiming
IRC section 168(k) bonus depreciation. See the Department’s
two information releases available at http://tax.ohio.gov/divisions/communications/information_releases/picft200202.html
These adjustments must be allocated in the same manner as the
federal bonus depreciation.
8. Q. Is Ohio going to have its own version of the
A. No. However, the provider of the federal K-1 must furnish
all the requisite information to calculate Ohio income tax.
9. Q. How should past accumulated income and gains be
A. The trust will not pay Ohio income tax on such gains.
However, if the tax on trust expires as scheduled, then
starting with the taxable year beginning in 2005 the
beneficiary receiving such income and gains may be required
to pay Ohio income tax on such amounts. See ORC section
10. Q. Is Ohio going to recognize the stepped-up
basis for assets as of 1/1/2002?
A. No. Ohio law does not allow for such an adjustment.
11. Q. Can the trust use the Ohio form IT-1140,
Pass-through Entity and Trust Withholding Tax Return, to
report trust income from real estate?
A. A trust should use Ohio form IT-1140 only with respect to
the trust’s distribution of income and gains to the extent
the income or gain is attributable either to real estate
located in Ohio or to tangible personal property located in
Ohio. Ohio’s enactment of an income tax on trusts does not
affect the use or filing of Ohio form IT-1140. On the other
hand, the trust must use Ohio form IT-1041, the annual
fiduciary income tax return for trusts, to pay tax on income
and gains which the trust does not distribute. So, a trust
which distributes some, but not all of its income and gains,
will likely have to file both Ohio returns.
12. Q. Must the trust pay tax on undistributed income
and undistributed capital gains?
A. Yes. The "starting point" for calculating Ohio’s income
tax on trusts is the trust’s federal taxable income. However,
ORC section 5747.01(S)(7) allows a deduction for any gain
resulting from the sale, exchange, or other disposition of
Ohio "public obligations" to the extent such gain is included
in the trust’s federal taxable income. "Public obligations"
is defined in ORC section 5709.76(D)(5).
13. Q. In previous taxable years a pass-through
entity in which the trust is an equity investor had "passed
through" to the trust various Ohio credits. Ohio law often
provides for carry forwards of unused credits. Since for
taxable years beginning before 2002 the trust was not subject
to Ohio income tax and thus the trust did not use any portion
of the passed-through credits, can the trust apply those
credits against the Ohio income tax otherwise imposed for the
trust’s taxable year beginning in 2002?
A. No. Except as discussed in the answer to the following
question, trusts cannot claim any credits which originated in
taxable years beginning before 2002.
14. Q. In previous taxable years a pass-through
entity in which the trust is an equity investor had "passed
through" to the trust the ORC section 5747.31 credit for the
purchase of new manufacturing machinery and equipment. That
law provides that the taxpayer shall claim one-seventh of the
credit amount for the calendar year in which the new
manufacturing machinery and equipment is purchased and shall
claim in each of the next ensuing six taxable years an
additional one-seventh amount of the credit (often referred
to as the "remaining one-seventh amounts"). Starting with the
taxable year beginning in 2002, can the trust claim the
remaining one-seventh amounts?
A. Yes -- but only to the extent the trust has not
distributed current year income to the beneficiaries. To the
extent that the trust has distributed current year income to
the beneficiaries, the beneficiaries -- rather than the trust
-- will claim all or a portion of the remaining one-seventh
amount available for the taxable year. The U.S. regulations
regarding the trust's and the beneficiaries' apportioning
("sharing") of credits should be used.
15. Q. If an executor of a decedent’s estate and the
trustee of a qualified irrevocable trust, as defined in IRC
section 645(b)(1), make the election provided in IRC section
645, for Ohio income tax purposes must the estate include the
income of the trust (so that the trust itself is not subject
to Ohio’s income tax)? Alternatively, when filing its Ohio
annual fiduciary income tax return, Ohio form IT-1041, can
the estate "back out" from the estate’s federal taxable
income the trust’s portion of income and deductions (so that
the estate will not pay Ohio income tax on the trust’s income
and so that the trust will separately be subject to Ohio’s
income tax and have to file its own, separate Ohio fiduciary
income tax return, Ohio form IT-1041T)?
A. If the executor and trustee make the IRC section 645
election, then for Ohio income tax purposes (i) the estate
must include the income of the trust and (ii) the trust
itself is not subject to Ohio’s income tax for the taxable
years to which the election applies. As such, when the estate
files its Ohio fiduciary income tax return, Ohio form
IT-1041, the estate cannot "back out" from the estate’s
federal taxable income the trust’s portion of income and
deductions.16. Q. What is "modified nonbusiness
A. ORC section 5747.01(BB)(3) states that "modified
nonbusiness income" is a trust’s Ohio taxable income (defined
in ORC section 5747.01(S)) other than the following amounts:
- Modified business income as defined in ORC section
- The qualifying trust amount as defined in ORC section
- Qualifying investment income as defined in ORC section
Generally, modified nonbusiness income is income from
investments in intangible personal property excluding equity
(ownership) interests in closely-held businesses, S
corporations, partnerships, and limited liability companies
treated as partnerships for federal income tax purposes.
Examples of modified nonbusiness income generally include the
following: (i) dividend income, (ii) interest income from
savings accounts, money market accounts, and bonds, and (iii)
capital gains and losses from the sale of publicly-traded
stocks and publicly-traded bonds.
* * * * *
If you have any questions, please see the Department’s "home
page", select "E-mail-Us" (in the upper right hand corner of
the screen), and then send in your question.
1See Amended Substitute Senate Bill 261,
124th General Assembly (effective June 5, 2002)
and House Bill 675, 124th General Assembly
(effective December 13, 2002). URL:http://www.legislature.state.oh.us/bill_search.cfm?number=&session=124