Income Allocation

In a 1041 return, income is designated as belonging to either the fiduciary or the beneficiary. Screen WKK1 can be used to allocate or adjust many of the items that flow to the beneficiaries' Schedules K-1. For anything to flow to Schedule K-1, there must be a value on Wks Sch K-1 first (either through other data entry that flows there or by direct entry on the WKK1 screen).

Losses

Losses do not flow to the Schedules K-1 until the final year of the return. While the D2 screen may be used to allocate amounts to beneficiaries, losses may not be allocated, and lines 17 and 18 do not allow negative numbers to be entered.

The losses will be carried over on the fiduciary return until they can be applied, or until the final year when they may be distributed. See Schedule D and Wks CG Loss.

If this is a final year 1041, for question F on screen 1, mark the Final return option and the losses will carry to the Schedules K-1 per IRS guidelines.

Net operating loss

A current-year net operating loss can be carried over by making the election on the NOL screen. Any unused NOL will not flow to a beneficiary's K-1 except in the final year of the return. If it is the final year, make sure the Final return option is checked on screen 1. You may also need to select Election to carry forward ONLY on screen NOL in a final year return so that the loss will be distributed instead of carried back.

Capital loss

Unused capital losses will flow to a beneficiary's K-1 only in a final year.

• Distribution of capital losses flow to line 11, not to lines 3 and 4

• Distribution of net operating losses also flow Schedule K-1, line 11

Capital gain

By default, net capital gains are allocated to the fiduciary, except in the final year. See Drake Tax - 1041 - Income Distribution for details.

Exemptions

The exemption is $100 unless the return is one of the following:

• A simple trust and screen 1 has the Distribute all income box checked. In this case, the exemption is $300 because a trust whose governing instrument requires that all income be distributed currently is allowed a $300 exemption, even if it distributed amounts other than income during the tax year.

• A decedent's estate, in which case a $600 exemption is allowed.

• A qualified disability trust, in which case a $4,700 exemption is allowed.

  • The indicator on screen 1, Qualified disability must be marked.

  • This exemption is not allowed in the final year.

• A final year estate or trust return, in which case no exemption amount is allowed.

  • See the screen MISC in data entry and the 1041 Instructions for more information.

Schedules K-1

Final Year

On a final year K-1:

• Distribution of capital losses flows to line 11, not to lines 3 and 4.

• Distribution of net operating losses also flows to line 11 on Schedule K-1.

Simple Trust

On screen 1, if you have marked Simple Trust, but you have not entered screen K1 to produce a Schedule K-1 for the beneficiary, EF Message 0654 generates.

The instructions state:

"A trust may qualify as a simple trust if:

The trust instrument requires that all income must be distributed currently;

The trust instrument doesn't provide that any amounts are to be paid, permanently set aside, or used for charitable purposes; and

The trust doesn't distribute amounts allocated to the corpus of the trust."

If allowed to e-file without entering at least one K1 screen, this would result in IRS Reject F1041-028.

Full Grantor

Full Grantor trusts do not issue Schedule K-1. This information is entered on a statement using the GRS screen instead (EF Message 5460).

Schedules C, E and F in a grantor trust do not flow to the Grantor Schedules. You must enter the amounts on the respective GRS screens directly.

Partial Grantor

If the trust is a partial Grantor type trust, you must check the box Grantor on any applicable screens to have those amounts included on the grantor statement. A partial grantor type trust requires both Schedules K-1 and a Grantor statement.

K1G Explanation

An explanation entered on screen K1G appears in View/Print mode as (K1_ATT) on a supporting statement identifying the beneficiary, which can be distributed with the Schedule K-1. It is not designed to flow to the beneficiaries' Schedule K-1. It

The statement is attached to Form 1041.

Schedule K-1 Received

A 1041 can be a partner in a partnership, a shareholder in a S corporation, or a beneficiary of another fiduciary. Data entry screens for a K1P, K1F, and K1S received by the fiduciary are available on the Income tab.

Basis is not tracked in the 1041 package, so some lines from the Schedule K-1 received are unable to be entered:

• K1P screen: entry is not available for lines 12, 14, and 19.

• K1S screen: entry is not available for line 11.

Charitable Remainder Trust

To select that a 1041 should be considered to be a Charitable Remainder Trust for state purposes, go to screen 2 and select the Charitable Remainder box.

Income Distribution Deduction

See Drake Tax - 1041 - Income Distribution Deduction (Schedules B and K-1) for details.

Links

• Publication 559

• Form 1041 Instructions

• 1041 Schedule K-1 Instructions