The U.S. Department of the Treasury and the IRS on June 18 issued final regulations on electing small business trusts (ESBTs). The IRS quickly made final with no changes the proposed regulations that were released in April. The final regulations are effective for all ESBTs retroactively after Dec. 31, 2017.
The regulations aim to make certain that S-corporation income remains subject to federal income tax when a nonresident alien (NRA) is the deemed owner (grantor) of the ESBT under the grantor trust rules. According to the regulations, if an NRA is grantor of all or a portion of an ESBT, the grantor portion of the net income of the ESBT must be reallocated to the S portion of the ESBT. This allocation results in the S-corporation income being taxed to the ESBT at the highest trust rate rather than passing through to the NRA and potentially escaping U.S. tax.