Illinois K-1-T: Non-business income (step 3) vs. business income (step 4)

Forum|Forum|4 months ago
February 26, 2026
1 reply
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I'm filing a 1041 for the first time for a trust with a sole beneficiary where all of the income is being distributed. Beneficiary and trust are Illinois residents/domicile. The trust has passive income - mutual funds, ETFs - invested solely for the benefit of providing the beneficiary income and asset growth. Turbotax Business is placing this income in Business Income Step 4, not Nonbusiness Income Step 3. Not sure if this is correct - may be correct if the trust investment operations is considered it's "business". Can someone advise if Turbotax Business is placing this income in the correct section, and if there's a step by step question I missed, or answered incorrectly? It should be noted that I don't think this seems to be affecting the beneficiary's personal taxes as the K-1 seems not to differentiate between business vs. non-business.

TurboTax Business Windows

PatriciaV

Level 15

Please clarify the source of the income that is being reported as non-passive (business) income. In general, interest & dividends are typically passive (nonbusiness) income.

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maxfischerAuthor

Level 2

Thanks for replying. It is dividend distributions from equity mutual funds/ETFs, interest from fixed income ETFs and treasury bonds, and some capital gains from sales of the above.

DaveF1006

Level 15

Yes, it is correct on your Illinois income tax return. Unlike the IRS, which sees "Business Income" as active trade (like a shop or a farm), Illinois law (35 ILCS 5/1501) defines it as:

"...all income that may be treated as apportionable... All income of a trust or estate is business incomeunless it is clearly attributable to only one state and is earned through activities totally unrelated to any business you are conducting."

Since the beneficiary and the trust are both Illinois residents, the distinction between Step 3 and Step 4 is mathematically irrelevant to your final Illinois tax return.

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