 Hello and welcome to the session in which we learn how to compute the taxable entity income and that entity is a state or trust During the process. We're gonna learn how to compute accounting income learn about accounting income Also learn about an important concept in this in this context, which is the n I and the n I is this Rebutable net income and I'm gonna be referring to it continuously the n I then eventually we would learn about Allocating the n I to the beneficiaries and I will do this in the next session because there's gonna be a lot of information to Absorb here and before we got to this point in the prior session. I talked about the state and trust How are they created the purpose of them gave you an overview? So this way if you're not sure about what what is in a state or a trust look at the prior recording because it's better to have A good idea So if you are an accounting students or a CPA candidate, especially if you're a CPA candidate This topic is not well covered in your college education and if it's covered It's not covered that good or in depth what I do at forehead lectures calm I provide lectures plus examples plus additional resources through false multiple choice exercises That's gonna help you increase your score at your CPA exam. No, I don't replace your CPA prep course I don't replace your becker Raj or Glyme or whatever course you are taking I can't do that I wish I can but I can't but I can help you Improve your grade by 10 to 15 points. How so I explain the material once you learn it like once you go over this session today You're gonna feel much much much more comfortable with the topic of Vaccation of a state and trust and here's what you are risking really. This is my offer to you Are you willing to pay $30 for a month just to try out my system? And this is your maximum loss where where it could help improve your grade on the CPA exam and help you pass the test Are you willing to make that trade with me? Okay, your maximum loss is $30 Your your output your gain could be passing the exam You make your choice and if not for anything check out my website to find out how well is your university doing on the CPA? Exam if you are taking any other accounting courses I have supplementary and lectures for other courses Please connect with me on LinkedIn if you haven't done so and check out my LinkedIn recommendation students that already used my system They write recommendations on my LinkedIn. Please look them up Like this lecture share it if it benefits you it means it might benefit other So why not share the wealth connect with me on Instagram and Facebook as well? So we're gonna be using those steps To compute the taxable income for a state and trust. Okay, so what are those steps? And we're gonna be defining each one of them in this session We mentioned some of them in the prior session. I told you don't worry We'll mention it in the next session and this is the next session first step one We're gonna determine accounting income. This is the first thing we're gonna learn today Step two, we're gonna compute entity taxable income before The distribution deduction. This is the distribution deduction something we're gonna learn about shortly step three determine the DNI and The distribution deduction once you determine the DNI You'll be able to determine your distribution deduction once you determine your distribution deduction We're gonna go back and compute taxable income like step two less step three So we're gonna find the number here. Let's let's assume the number here was 10,000 and the deduction here was 2,000 Well, then 10,000 minus 2,000 will give us here 8,000 and this will be your That actual taxable income then step five as I told you we will not worry about this in the session We'll take care of it next session. So simply put in this session. I just want to give you the big picture We're gonna learn about computing three things actually more than three But those are the big three things Accounting income the first thing then we're gonna learn how to compute taxable income for a state and trust So the whole thing is to compute taxable income for a state and trust But before we do so we need to know we need to know accounting income and actually we need to know what DNI is and From DNI we're gonna find the distribution deduction then go back and compute taxable income Don't worry. We're gonna be going back and forth back and forth a little bit, but believe me I will you will understand what's going on shortly Starting with accounting income. That's very important. So it is accounting income This concept is kind of a little bit odd for a tax class because in a tax class. Basically, you have taxable one figures Like tax figures here. You're gonna have accounting figures and tax figures. Don't worry about it too much It's very easy and straightforward. Let's go ahead and start first to find what's accounting income Usually and the reason I say usually because these rules are by state But usually you can get on the CPA exam on your tax course You can go with this information Accounting income is the amount of income the beneficiaries of the trust or a state is a little bit is eligible to receive from the entity So simply put how much are you eligible to receive from the entity? We call this Accounting income accounting income is based on how do we determine this based on the controlling or grant or document? What is this controlling or grant or document? Well, the person that created the trust they determine How much they want to give out? Give out or make the beneficiaries eligible to receive from the trust. This is what this is what? This is what accounting income is when I when I create my trust I say I want my interest to be distributed my dividend to be distributed capital gain not distributed or capital gain distributed Whatever I want to do I determine this so either the document will state this or let's assume the document is silent The state law determine whether amounts are allocated to the corpus or to current income Remember in the prior session we looked at something called current income in corpus So once I have a trust let's assume I have a trust for my son And what I do is this I put stocks bonds in there and I tell the trustee the person that's in charge my lawyer I'll tell look This these assets my stocks and my bonds my son cannot touch them but any dividend and any dividend and Interest going out of this trust my son can use it for his education So simply put let me go back and maybe draw this trust again. So remember. This is the trust here This is where I have my assets. Okay, and I am the grand tour. I I gave the money I put that money into the trust. I have a trustee who happens to be My lawyer and I have the beneficiaries is my son Adam. Okay. I'm just making this up So what I do is I determine I have assets in here. I have stocks and bonds So I tell the trustee, you know the interest in the dividend my son can use it for whatever purpose The the corpus the principle the actual stocks and the actual bonds stays in there until for example My son turns 30 35 whatever age I want I want him to turn into then I'll give him then I will close the fund And not the fund the trust this is basically what we mean by allocating between the current income and the corpus And why is this important? Here's what's gonna happen, and I'm gonna give you the big picture here The look the income anything that's allocated to income is gonna be taxed by Adam Anything that's gonna be considered corpus The trust will pay the taxes on it remember we don't have double taxation So the money is not double taxed, but we have to determine who's gonna pay it Is it the trust gonna pay the taxes or the beneficiary anything that's considered income? My son Adam will pay it anything that's considered part of the corpus I said this is gonna be part of the corpus and I can make anything part of the corpus Or I can make anything part of income then it will be then it will be taxed Paid the tax paid by the trust so that's important and I talked about this in the prior session If you want to look at this topic if the entity distribute distribute income currently that income should generally be Corresponding to accounting income generally a generally it doesn't have to because again I can't do whatever I want to but we're gonna say it's gonna be Accounting income the amount that can be distributed like interest and dividend generally speaking When specific items of income and expenditure are Allocated either to the income beneficiaries or to the corpus the desire of the grand tour or the decedents are put into effect again The grand tour determine or the person that passed away from their will okay when I pass away if I have a will This is what happened My wishes will be put into effect whether something is considered Income or corpus part of the corpus part of the principle okay where the controlling document is silent again The state will determine whether this amount should go to the income is considered income or corpus And this is basically an overview whether they generally considered income Allocated to income ordinary and operating their income from trusted assets any ordinary income interest dividend trend royalty income one half of the fiduciary fees and commission Allocated to the income then what's considered part of the corpus of the of the actual of the actual trust Any depreciation on the business asset if I have a building I have a warehouse wherever I'm renting a Casualty gain or loss on income producing property again on the property on the income producing whatever that income producing property is my warehouse my My my my my office building my commercial real estate wherever it is any insurance recoveries from income producing asset again If I received any recoveries, that's a sum one of my buildings was on fire. I received Insurance recoveries it goes to the corpus the corpus will pay taxes Capital gains and losses on the investment sometime you might have losses sometime you might have gains You might you know the trustee might sell some asset incur losses or gains It stays anything is absorbed absorbed by the corpus, which is the trust itself the corporation Any stock split in one half of the commission so notice one half of the commission is allocated to income one half of the commission is allocated to the to the corpus Let's look at an example to start to kind of see what this accounting income basically means The Arnold trust is a simple trust and we talked about the simple trust and the complex trust in the prior session If you don't know what this is, please go back and view it Miss Bennett is the soul Benny in the current year the trust earns $20,000 in taxable interest in 15,000 in tax exempt so they have taxable interest and tax exempt interest in addition The trust recognizes $8,000 of capital gains. So they received taxable interest Interest free Tax free interest which is tax exempt interest in capital gain the trustee assesses a fee of 11,000 for the year So the trustee said you there's an 11,000 dollar charge Okay, if the trust agreement allocate fees and capital gain to corpus. So here's what's gonna happen The the the agreement says any long-term any gain any long-term capital gains and any fees They stay with the corpus. Okay. What else then the other thing is considered accounting income goes to the Benny So if the trust allocate fees and capital gain to corpus trust accounting income again here We are computing accounting income is 35,000. Why 35,000? It's the 15 of the tax exempt and the 20,000 taxable taxable amount So the income Benny receives no immediate benefit from this trust capital gain. Look Ms. Bennett is not receiving the capital gain Therefore, she should not she should not bear of any of its financial burden because you know She's not getting that capital gain if the corpus is getting the capital gain The corpus will pay taxes on that capital gain and they said any any fees it gets deducted from the corpus That's what the person the individual wanted to do Assume the same fact except the trust agreement allocate the fiduciary fees to income therefore Well, we generated interests, but guess what that some of that interest not some of it The interest will pay the fiduciary fees who decided this the Grand Tour the person that created the fund. What's gonna happen is this? Mrs. Bennett would receive 35,000 of interest income. Well, then she's gonna have to pay 11,000 Not she but that's what's gonna happen. They will do this computation and the trust accounting income is 24,000 let's change the scenario Now assume that the trust agreement allocate All capital gain and losses and one half of the trustees commission. What is the accounting income? Well? 35,000 for the interest 8,000 of capital gain Minus half of the fees for the fiduciary Therefore 37,500 what happened to the remainder of this fee it goes to the corpus Corpus is responsible for it. That's the big picture. Let's kind of just to kind of Confirm our knowledge and increase our knowledge. Let's compute accounting income here Okay, complete the chart below indicating the Tigers trust entity accounting income because that's something you need to know for each of the Alternatives for this purpose use the following information. We have interest income We have and that interest income is taxable We have interest income that's tax exempt 30,000 interest income that's taxable 300,000 sorry if I read all the numbers and the reason I read all the numbers I Try to read all the numbers because I do have blind viewers and they always ask me to please read the numbers So if you feel I am reading the numbers That's the reason I do so and if you're a blind viewer and I did not read all the numbers I do apologize. I'll try to do my best. Okay Interest income tax exempt and don't worry about the empty preference is 20,000 long-term capital gain 40,000 trusty fee is 10,000 so those are the figures that we are giving and we're gonna be giving different scenarios to compute trust Accounting income or accounting income for this trust the first scenario This says the fees and capital gains are allocated to the corpus to the trust. Well, what's left then? So the fees are out $10,000 we don't long-term capital gains are out. So what's left is 350 which is interest income a taxable interest income tax free an interest income tax exempt but a empty preference so 350 Let's look at the second scenario capital gains allocable to corpus But one half of the fee allocable to income. Well, so all what we change is from the 350 from the prior example We're gonna absorb 5,000 of the trusty 5,000 of the trusty fee, which is 10,000 We're gonna absorb half therefore accounting income is 345,000 Capital gain allocable to income silent concerning allocation of fees. Well, now we're gonna include the capital gain Therefore, we're gonna take we're gonna start with 350. We're gonna start what we started with We're gonna add 40,000 of Capital gains that's 390 and we're gonna deduct 5,000 because the if it's if it's silent the state will say Split the fee in half Therefore the accounting income 385,000 The last scenario fees and exempt income are allocable to corpus. So notice what happened here now the fees The ten thousand dollar is allocable to corpus in as well as the exempt income So this is also it doesn't matter, you know, we're gonna consider both of these exam This is also corpus and they're silent and regard to the capital gain capital losses So when you are silent in regards to capital gains and capital losses the state generally speaking will consider this corpus Therefore what's left as accounting income is only the interest income that's taxable 300,000 so this is just an overview to get an overview exercise To help you understand how we compute accounting income again We have to know what accounting income is in the context of computing taxable income for estate and trust and to compute the DNI and The deduction for the DNI. Okay, so let's take a look at the taxable portion of it So this is what a tax return would look like 1041 I'm not gonna go over everything separate everything in the tails But basically it looks like an income statement you have an income section and a deduction section What is the income section? What type of income would a trust receive? Well, the the trust would receive interest ordinary dividend qualified dividend business income capital gains Farm income ordinary income other income notice we have no wages, right? Because wages goes on the 1040, you know, the trust does not work, right? The trust has assets and those assets will generate income in form of interest dividend so on and so forth Okay now also as I told you it looks like an income statement Then the trust will have deductions. What type of deductions would the trust have interests taxes? fiduciary fees which is a little bit unusual You don't see this on schedule C but think of the fiduciary fees as Think of your higher management. You hire people to run the company You hire a CEO you have to pay the CEO right you have to hire someone to run the fund Then when when you pay someone to run your company you deduct your fees same thing So this is kind of a little bit unusual. Okay, cheer the bull deduction Cheer the bull deduction and this number is coming from schedule a line 7 which we're gonna see in a moment So let's take a look just have few comments about this first. I Want you to understand that this is let me highlight the thing. That's a little bit unusual one is fiduciary fees Okay, and again as I said this that you will have a number here and think of it as the the the the Salary for the CEO and you can only deduct based on taxable income. What does that mean? This is important to know so it's not you don't you don't deduct everything. So let's assume you received $1,000 worth of interest That's the only thing that you have for this fund just for the sake of simplicity of this amount 600 is taxable 400 is money bound. So in other words 60% of the income is taxable for 40% of the income is not taxable now if you're paying your This person to manage your fund. I'm gonna make this as unusual a hundred thousand dollar Well, you won't pay somebody a hundred thousand dollar if you're only making a thousand dollar But that's beside the point what's gonna happen the only amount that you can deduct here is the amount of 60% of The salary therefore you can deduct $60,000 again The example is a little bit out of whack because how can you make only a thousand dollar in interest and you're paying someone? $100,000 to run your to run your trust. Okay, but that's beside the point So the only you can deduct based on the taxable So what you do is you look at all of your income You total them then you want to know how much is the tax-free as percentage of the total 400 out of a thousand is 400 that amount cannot be allocated in terms of fiduciary fees Okay, so you only can deduct 60 percent. All right, so 60 percent of the trustee management fees is deductible Let's talk about contribution to charity contribution to charity is 100 percent deductible 100% of a deductible as long as it's provided in in a will in other words the grant or the person that created the fund or the Seed and the person that passed away said I would like to give you know the amount this amount of charity So that you cannot limit that contribution by anything if you can if you want to have a million dollar an income And you want to deduct the whole thing and charities. That's fine There's no limitation as long as it's in the world So the trustee cannot decide on the charity the beneficiaries Let's assume that the kids of that individual or Husbands or wife. They cannot decide on that. Okay, so that's it's in the world. That's what we it's deductible Now you can give if you want to but it's not deductible. Okay, then we have something unusual So we we covered the charity Then we're gonna come to this something unusual not unusual something that we have to be that we have to learn about and that's the Income distribution deduction and it's right here line 18. Now. This is for 2019 The form 2020 2021 could change a little but the idea is the same So if you're looking at this in 2021 and there are slight changes obviously, you know kind of Catch up. Otherwise, it practically it should be the same. So income Income distribution deduction. What is that? Well, guess what? We're gonna give the beneficiaries money Remember, we're gonna make money. We're gonna make money from the trust But we're gonna distribute it Distribute some of it to the beneficiaries when we distributed to the beneficiaries We have to deduct it here. Why because we are computing the taxable income for the trust Well, the money can only be taxed once if we're gonna give it to the Benny's the Benny's will pay the beneficiaries will pay the tax on it If we're gonna keep it in the trust part of the corpus the corpus will pay will pay the tax Okay, so you know again, we might keep the capital gain But we might distribute the interest so the interest kind of in other words We're gonna add the interest here then deducted here. Okay deducted here Why because it's gonna and what's gonna happen to it? It's gonna go actually it's gonna leave 1041 go on schedule k1 and It goes to the individual and the individual will pay taxes on it separately goes to their schedule e from their schedule e It goes under the taxable income So those are three items that there are unusual and specifically we're gonna start to look a little bit more at this Income distribution deduction. How do we come up with this income distribution deduction because that's important Because that's gonna determine and usually it's it's a large deduction Why because the trust may be may exist to give out that money. Therefore, we have to deduct this amount. Okay, also The trust will have an exemption. I spoke about the exemption in the prior session Basically, we have three type of exemptions and not exemptions. We have three type of fees if the trust is a simple trust Here it goes $100. I'm sorry. Simple is $300. You can deduct $300 if it's a complex complex trust It's $100 and if it's an estate trust if it's an estate trust, it's where is the state here? simple complex The sedance estate $600. It's just something you need to be aware of now Maybe you're looking at this recording in 2022 and they might change those exemptions. They usually don't they've been Same exemptions for years. Just FYI in case they change just, you know Adjust accordingly. Now, remember I told you about the cheerable deduction and what's gonna happen It comes from schedule A line 7 and this is this is the second page This is schedule A. You just kind of compute your depreciation You'll take this number and you plug it up here. You don't do anything soft rule will do it for you I only ever only completed only one 1041 in my lifetime So I'm not very familiar with this but I'm familiar enough that I can explain it to you So it goes the charitable deduction goes here Then you have to compute you have to compute this income distribution deduction comes from schedule B line 15 Okay, schedule B right here line 15. It goes here now here. So we need to talk a little bit more about the d ni the dividend I'm sorry. Not the dividend this this Tributable net income or d ni. So how do we what's the d ni? Well, the d ni is the maximum maximum amount of distribution on which the beneficiaries can be taxed So first you have to compute how much the bennie can be taxed at. This is the maximum amount Maximum amount. Now. Why is this important? You might give the beneficiary more Money than they should be taxed on for example, let's assume for the sake of simplicity here You gave the beneficiaries a thousand dollar Okay, this is the This is what you just actually distributed the beneficiaries but The trust only made just for the sake of the example four hundred dollars So six hundred dollars. Hold on a second. So if the trust made a thousand of income I'm sorry. You gave me a thousand. He gave the bennie a thousand this goes to the individual The trust itself only made an income of four hundred So how can you pay more what the what the trust made? Well, you can because the trust have Corpus they have principal they have bonds they have cash they have cds They have other assets. So it must have been that the six hundred dollar is from somewhere else Not income. Well, if it's from somewhere else, then it's not really taxable to me if i'm if i'm the beneficiaries because The this money was already taxed. How so remember when the person put that money into the trust when that person passed away Let's assume. It's a decedent when that person passed away The the trust there was an estate tax. So the individual And it's really like around 50 paid paid their estate tax Okay, let's assume they put in that in that fund in that trust a million dollar and that individual paid 40 percent on that So that individual sent four hundred thousand dollar Tack a check to the iris not the individual the trust send the tax send the check to the iris because the person passed away Now that money that's sitting in the trust already been taxed So if it's distributed to you think of it as a think of it as a return of capital Why because this money is coming from The from the corpus itself where it has been taxed. Okay, so this is why we have to compute the d ni Okay, so the the maximum amount that the individual and we're going to see how it works later on Okay, so how to compute now d and i how to compute d and i so here's how we compute d and i We would first compute taxable income before the distribution deduction So basically what does that mean? That means we're going to go to this page And compute this taxable income We're going to compute taxable income But we're going to skip this number because we don't know this number actually yet We're going to skip so we're going to compute we're going to basically compute everything except this deduction line 18 Except that we don't have anything here yet. That's what we're trying actually to compute so we're going to First compute this so find out taxable income before before the distribution deduction then we're going to add to it We're going to go back and add the exemption and that exemption could be 100 300 or 600 depending on the type of the trust that we have Then we're going to add to it. We're going to add to it net notice net tax exempt interest It means we're going to add back tax exempt interest, but sometimes That's that tax exempt interest if there's there is some expense related to it. We'll deduct that expense We're going to add back net tax exempt interest Then we are going to deduct capital gains. Why because capital gains stays with the Corpus stays with the corpus then we will add We will add capital losses if that's the case Add this is add if there's any capital losses We add and will deduct capital gains and this is how we come up with d and i d and i So start with taxable income before the distribution And go through this now once we have d and i Once we have this number here d and i line seven now we need to compute income distribution D deduction. This is the deduction. This is the deduction that's going to go on the previous page How do we compute the income distribution deduction? Well We're going to look at the amount of distribution actually received We're going to be looking at the lesser lesser notice. This is the income distribution deduction deduction. This is the line 15 Which is going to go on page one And we're going to compare this the lesser of the amount of distribution received how much did the Benny received the lesser of that or the share of d and i we're going to look at their d and i minus net By net exempt it's interest. We're going to look at the d and i minus net exempt interest The lower of these two will be on line 15 and from line 15 We're going to go back to page one and plug this number here on line 18 to figure out exactly our tax bill because this is going to give us The appropriate amount to compute our taxes where we have to pay the tax bill Okay, so this is how it basically work. So the reason we go through all of this to find out What is on line 18 and what is really on line 18 on line 18 what went to the Benny went to the beneficiaries went to them is deducted why it's deducted because the corpus don't pay taxes on it They'll pay taxes on it. So it's taken out. It's deducted from here It's deducted from here and whatever's left is paid by the corpus taxes paid by the corpus Okay, now the best way to illustrate this obviously is to actually Look at an actual example to see how this all fits together And I will I will work another example after this session. Okay, because it's a lot It's a lot and the way the CPA exam review course are going to go with this with you. They're going to go very quickly and They're going to give you shortcuts. Great. If you want to memorize the shortcut, that's fine I'm I'm not against that But if you understand them, it's just much easier. You'll have more confidence on the exam day And this is what I do. This is what farhat lecture farhat lectures do I explain the material in depth. Therefore, you have more confidence on the exam day Of course, you can memorize shortcuts But better to understand it. Okay The pork trust is required to distribute its current accounting income So current accounting income has to be distributed annually to the sole income. Benny, which is Barbara Capital gains and losses and all other expenses are allocated to the corpus and the current here pork incurs the following items They have dividend income means they have some stocks in that in that trust taxable interests tax exempt interest Net long-term capital gain and we have the fiduciary fees. Okay, so Here's all The income the first thing we want to know is what is the accounting income? And as I'm doing the accounting income, I'm going to also figure out the taxable income $25,000 is this considered accounting income? Well, look, it says they gave us a hint current accounting income. Yes Dividend is current accounting income. Why it's current. It means they're generating this continuously Okay, so it's going to be part of our accounting income is dividend taxable Of course, it is taxable income as well. It's going to go on page one as well Taxable interest 15,000. Is it part of accounting income? Yes Interest is part of accounting income is interest taxable. He has it is therefore It's 15,000 as well under taxable income tax exempt interest 20,000 Is that part of accounting income? Did we earn 20,000? Yes, we did. Yes, we did is it taxable? No, it's not because it's by nature tax exempt interest Net long-term capital gain 10,000. What do they say about net long-term capital gain? They said something about it It's allocable to the to the court So it's not part of the accounting income because accounting income is what really gets distributed And what the beneficiary is responsible for therefore there is nothing under accounting income Is is capital gain taxable? You bet it's taxable. Therefore, it's under the taxable column Let's take a look at the fiduciary fees. It's $6,000. Is it accounting income? No, it's not Can it be used for tax purposes? Is it deductible? Yes, it is Is it fully deductible? Well, generally speaking. Yes, unless you have taxable income. Do you have taxable income? Yes, you do Notice you have tax exempt interest and I'm sorry. Do you have tax exempt interest? Yes, you do. You have 20,000 Well, guess what? We have income of 60,000 40 plus 20 60 of which 40,000 is non Is not tax exempt So four divided by six equal to two third So two third of this is actually deductible which will make it 40,000 Now let's talk about the personal exemption. We're going to assume. This is a complex trust fund accounting income No, it's not. Is it deductible under taxable income? Yes, you can have a deduction of 300 dollars So your accounting income is $60,000. That's your accounting income. That's your accounting income and remember part of it 40 out of 60 is Is taxable and 20,000 was tax free Your taxable income is 45,700. But look at me. I'm sorry. Listen to me. It's 45,700 before before the The deduction Distribution deduction so we did not distribute the deduction yet because we first we have to find the n i So how do we find the n i? We're going to start with again our taxable income before the n i before the distribution deduction. So it's 45,700. Okay, which is this number here Then we're going to make some adjustment with you guys remember on the prior slides I said personal exemption is added back 300 dollars Capital gain is deducted because why is deducted because capital gain stays with the Corpus it's deducted from that amount And we're going to add 18,000 of tax exempt interest. Why 18,000? We have 20,000 of tax exempt interest Then we have $2,000. That's related to that Which is basically that $2,000 that we could not deduct on in here In here as a fiduciary fees we can deduct to arrive to net tax exempt interest Which is 18,000 now we find d n i which is 54,000 d n i is 54,000 now we have to determine. What is our deduction? Okay, that's fine d n i is 54,000. What is our deduction? That's the question. How much can we deduct? Well? We're going to have to find out our deduction by taking. Remember, how do we find that deduction? Let's go back here. Let me just show you real quick on the prior slide So this is the d n i formula that we that we used now the deduction the income Distribution deduction and this is what we're trying to find out Is the lesser of the amount of distribution received or the share of d n i reduced by net exempt interest Now we don't have the amount of distribution received. Yes, we do. We said distribute everything 60,000 Now we're going to compare 60,000 to d n i minus tax exempt interest. So we're going to go back down here So remember we're going to have to choose between 60,000 60,000 which is the amount distributed the lesser of this or d n i which is 54,000 Minus minus 18 minus 18 minus 18. So 54,000 Minus 18 And that's going to give us 36,000. Therefore the distribution deduction is 36,000 36,000 good once we notice this the distribution deduction We can find the entity taxable income. What does that mean? Well? Our taxable income was 47,000 45,700 before this deduction. Now we know the deduction is 36,000 Therefore our taxable income is 9,700. So let's let's try to plug everything on the tax form This way it will just hopefully it will make more sense more sense to you So if we go back to the form itself, let's go back to the form the tax form And basically after all said and done our income distribution deduction was determined to be 36,000 d n i happens to be here line 754,000 and adjusted total income was 45,700 Now if we go back to page one Page one basically simply put this is the magic number. This is the 36,000 This is the 36,000 then we can deduct we can deduct um As distribution deduction distribution deduction. Okay Now let's uh, let's see what else basically in the next session What I would look what I what I would do is maybe I will work another example just to kind of Reinforce this I will just this is the next explanation I just always after the explanation for prop for issues like this. I work an example Also, I will work on something something with taxation of beneficiaries to see how the beneficiaries pay their taxes How does it affect their taxes? Again before the end of this recording I would like to remind you to check out my website forehead lectures calm Again, if you're studying for your cpa exam, don't shortchange yourself. Okay Your cpa exam is a 30 to 40 year investment in your career. Don't let a small subscription a nominal subscription Holding you from passing the test. Okay. Good luck study hard and most importantly stay safe