The governing instrument for Trust S provides that the trustee will establish a reserve for depreciation of trust rental property of $10,000 per year.In the current year, Trust S's rental property generates a tax depreciation deduction of $18,000.During the current year, the trustee distributes 30 percent of S's DNI to beneficiaries.Based on these facts, Trust S may take a depreciation deduction of

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The governing instrument for Trust S specifies a reserve for depreciation of $10,000 per year, but it does not limit the total amount of depreciation that can be deducted. Therefore, Trust S may deduct the tax depreciation deduction of $18,000 for the current year. However, since the trustee distributes only 30 percent of DNI to beneficiaries, only 30 percent of the depreciation deduction is allocated to the beneficiaries.

$18,000 tax depreciation deduction x 30% = $5,400 allocated to beneficiaries

The remaining $12,600 ($18,000 - $5,400) is allocated to the trust. Therefore, the trust may take a depreciation deduction of $12,600 for the current year, which is Choice B.

The Governing Instrument for Trust S Provides That the Trustee