CA requires a CA fiduciary to file Form 541 if a trust has gross income
of more than $10,000 or net income of more than $100.
Does anyone know the CA definition of "net income" for a trust as there
is no line item identified as net income either on the CA or Federal
trust return? There is only total income and taxable income and DNI.
I think "net income" here means "taxable income".
It makes sense that the amount required to file would be $100. The
trust tax on $100 would be $1 (rounded), and the trust is allowed a $1
exemption credit, so the minimum amount of trust taxable income to
trigger an actual tax liability would be $100 or more.
This parallels the CA treatment on the personal return, where the filing
requirement takes into account the exemption credit. On federal, a
taxable income greater than zero results in a tax liability; not so for
California, where you can have some taxable income and still not be
required to file. (California uses an exemption credit, instead of an
exemption deduction as on the federal return).
FWIW, the Revenue and Taxation code does contain the following, but it
doesn't seem to be a global definition:
[...] (1) For purposes of Chapter 2 (commencing with Section 23101),
Chapter 2.5 (commencing with Section 23400), and Chapter 3
(commencing with Section 23501), the term "taxable income" shall mean
Your reference deals with Corporate Taxation, not personal income tax.
It's section 18505 that defines who has to file a fiduciary return for a
trust. I couldn't find anything in any part of the 17000 & 18000
sections that defines net income. Then I realized that the Probate Code
deals with estates and "trusts." There it was in section 16328:
16328. "Net income" means the total receipts allocated to income
during an accounting period minus the disbursements made from income
during the accounting period, plus or minus transfers under this
chapter to or from income during the accounting period. During any
period in which the trust is being administered as a unitrust, either
pursuant to the powers conferred by Sections 16336.4 to 16336.6,
inclusive, or pursuant to the terms of the governing instrument, "net
income" means the unitrust amount, if the unitrust amount is no less
than 3 percent and no more than 5 percent of the fair market value
of the trust assets, whether determined annually or averaged on a
multiple year basis.
Naturally, it raises another query: What is the definition of
disbursements? I assume it means the expenses actually paid by the trust
(in my case it is fiduciary fees and tax preparer fees) plus any
distribution to beneficiaries that came out of income and not principal.
In other words, if I distribute money to the beneficiaries that is
included on the K-1 as taxable gross income, that is a disbursement I
can deduct to arrive at net income.
That make sense to anyone?
As Alan says, the CRTC section Mark quotes is from Part 11 of the
Code, which is the Corporation Tax Law. Trusts are taxed under the
Personal Income Tax Law, Part 10 of the Code. The corresponding
section in Part 10 (Sec. 17024.5) refers only to "adjusted gross
income" and not to "net income."
So 23051.5 is no help; it applies only to Chapter 2 (the franchise
tax) and Chapter 3 (the corporate income tax) of the Corporation Tax
Interestingly, in a quick search I couldn't find a statutory
definition of net income for a trust in the PIT Law. I did find a
1958 Legal Ruling (LR 075) that refers to the fact that a trust would
not include in its net income tax-exempt bond interest or the non-
taxable (at that time) portion of capital gains. The language of the
ruling implies that by "net income" it means "taxable income,"
although that wasn't the issue the ruling was addressing. (The
question was whether the US bond interest, exempt under the PIT Law
and thus not included in the trusts net income but taxable under the
franchise tax, was taxable to a corporate beneficiary of the trust.
On the slender reed of this ancient ruling and the fact that I can't
find a more specific definition in the form instructions or anywhere
else, I would venture a guess that "net income" for filing requirement
purposes would be the amount on Line 18 of the Form 541 -- i.e.,
taxable income before the DNI deduction. I say Line 18 rather than
Line 20 (after DNI) only because it seems to me that a trust that has
at least $100 to distribute would be required to file so that it has
to provide its beneficiaries with California K-1s. But I could be
wrong about that; maybe Line 20 is what they have in mind.
Alan's definition from the Probate Code is considerably broader, since
it doesn't exclude tax-exempt income. That would be a conservative
Katie in San Diego
I haven't looked anything up, but my instinct on this (based on federal
definitions only) is taxable income without respect to distributions (from
DNI), so I agree with Katie's choice of "line 18" as the controlling
amount. Distributions for complex trusts are optional, so there may be no
Just to be clear, I knew that the code section I quoted was not
applicable to trusts, but it was all I could find.
I think you guys must be looking at some other Form 541 -- for 2009,
line 17 is Adjusted Total Income, line 18 is income distribution
deduction, and line 20 is taxable income. So where Katie says "line 18"
above, I think she means "line 17".
Now, an estate doesn't have a filing requirement unless net income is
$1,000, and a trust, $100 (leaving gross income amounts aside). Before
the 0.25% tax bracket increase in 2009, the tax on those amounts would
be $10 and $1, respectively, which is exactly the amount of the
exemption credits allowed, respectively.
Coincidence? Or is the filing requirement based on the amount on line
20? It would seem odd to me that CA would deviate from federal in this
particular area, when they follow so closely in so many others.
I rarely if ever see Schedule K-1(541) forms where they are not
different from the federal K-1(1041) and there are not issues of
non-resident CA source income involved.
I initially assumed that if CA wanted the definition to be taxable
income a la the federal government, they would have said taxable income
and not net income. And.. if they meant adjusted total income they would
have said that. They chose to say Net Income. Therefore, I originally
felt comfortable using the Probate Code definition and the allocation
rules from Chapter 3 Part 4 Uniform Principal & Income Act. As a
distribution to a beneficiary from income is a disbursement, I felt
comfortable subtracting that amount. However, Katie raises a good point
relating to beneficiary taxable income for CA. If I subtract the
beneficiary distribution there would never be any Net Income (all income
is being distributed) and there would never be a CA return nor a K-1 to
a beneficiary reflecting CA source income.
Therefore, one should probably conclude that CA wants those CA K-1s and
you only get them if you don't subtract the distribution of income. That
would put the definition back onto Line 17, Adjusted Total Income.
However, after absorbing all of this.... I think CA really means DNI,
Distributed Net Income.... which for most trusts would be Line 17
Adjusted Total Income plus any excluded CA tax exempt income (e.g., in
my case interest on federal bonds) plus any capital gain allocated to a
Your logic has a minor flaw in it here. It's false to say "there would
never be a CA return nor a K-1 to a beneficiary...". Many returns would
still need to be filed because of the gross income filing requirement.
I'd be interested to hear what the FTB help line has to say about this.. ;-)
In practical terms, under what circumstances would CA care about getting
a 541 return?
1) CA source income to a non-resident beneficiary
2) California AGI is different from federal
3) the entity owes tax
If none of these situations exist, does the CA return really matter?
I realize that "care about getting a return" does not equal "legal
filing requirement", but I'm just trying to understand when preparing
the CA return would actually lead to a different tax result (assuming,
of course, the federal return and K-1's have been properly filed and
reflected on the beneficiary's returns).
True.. I was thinking about the one trust I still deal with that never
has GI in excess of $10K.
No CA source income in the trust. One of two beneficiaries is a CA resident.
Yes it is lower because federal interest income gets excluded.
It never owes tax as all income gets distributed to the two beneficiaries.
One of the beneficiaries (the trustee) is a CA resident. The federal K-1
income taxable by CA flows to the beneficiary's CA 540.
In my case.. no it never matters... which is why I asked the question to
begin with. Do I really need to file the CA 541?
You're quite right, Mark. I was working from memory and not looking
at the form when I wrote that. Silly me, I remembered Line 20 and
assumed there would be a Line 19 for DNI. But no, DNI is Line 18, and
Adjusted Total Income is Line 17.
I wonder what happened to Line 19 ..... ???
Katie in San Diego
Even if the trust has taxable income from non-CA sources, if the
fiduciary and/or beneficiary are CA residents, then it is all taxable by
CA. If there are multiple trustees and/or non-contingent beneficiaries,
and some but not all are CA residents, there is an apportionment of
taxable income based on the proportion of resident to non-resident persons.
for an example.
In your case, if no income is accumulated by the trust, then no problem.
You would want to issue a CA Schedule K-1 to the resident
beneficiary(s), so they have a document to back up the subtraction from
income of the federal gov't interest on the state return. Or a note
with the federal K-1 indicating how much of the interest is state-exempt.
This is the probably the only reason to file the CA return.
As it turns out, 2009 was the last year of federal interest income and
the CA trustee moved at the end of the year to Colorado. I am now
looking at the CO fiduciary return to get a feel for 2010.