Information Release

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 release.

Legend: "IRC" = Internal Revenue Code; "ORC" = Ohio Revised Code.

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.

Exemption #1

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 retirement trusts.


Exemption #2
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).


Exemption #3

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 tax"?

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 2001.
5. Q. Can trusts pay the estimated Ohio income tax based upon the federal annualization rules?

A. Yes.

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 income item?

A. Yes.

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 and
http://tax.ohio.gov/divisions/communications/information_releases/picft200201.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 K-1?

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 handled?

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 5747.01(A)(6).

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 carryforwards 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 income"?
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 5747.01(BB)(1),
- The qualifying trust amount as defined in ORC section 5747.01(BB)(2), and
- Qualifying investment income as defined in ORC section 5747.012.

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.

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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.
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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