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Other Tax Issues of InterestTrustA Trust is a legal entity created under state or common law. The trustee holds property for other parties called beneficiaries. Most trusts are used for the protection or conservation of property. Trusts actually operating as a "Trust" as defined by the Internal Revenue Code should file Form 1041, U.S. Income Tax Return for Estates and Trust. Sometimes an actual business is operated in the form of a trust. This type of trust does not file a Form 1041, the return filed depends upon the trust characteristics. A trust operating as a partnership reports income and expenses using the Form 1065, U.S. Return of Partnership Income and expenses are passed to the partners on the Schedule K-1 (Form 1065). A trust that has been granted a corporate charter under federal or state law reports its income and expenses on Form 1120, U.S. Corporation Income Tax Return. A trust operating as a sole proprietorship reports income and expenses on the Schedule C of the Form 1040 of the person who actually owns and operates it. A trust computes its income tax liability in much the same way an individual does and is allowed most of the credits and deductions that an individual is allowed. However, a special tax rate schedule is used. Deductions not allowed to individuals are not allowed to trusts. In recent years, the Internal Revenue Service has detected a
proliferation of abusive trust tax evasion schemes. Important References: Publication
925 Passive Activity and At-Risk Rules. |