FAQs Regarding Unrelated Business Income Tax (UBIT)
Q. Who is required to file for UBIT?
A. Anyone who has investments that are considered an unrelated business activity (like a LP or LLC) and/or contains debt financing within the tax-advantaged account and has net income over $1,000 or wishes to file for a NOL.
Q. Who pays the UBIT when it is owed?
A. The funds must be paid out of the IRA, not from the IRA owner’s personal funds.
Q. When are payments due?
A. April 15th the year following, just as other tax filings are required. Example: 2014 tax filings are due April 15, 2015.
Q. Where are payments made?
A. To the IRS through the Electronic Federal Taxpayer Payment System (EFTPS). Since January 1, 2011 all payments are required to be made through this system.
Q. What forms are filed if taxes are owed?
A. IRS Form 990-T and required supporting forms and schedules.
Q. Is it necessary to file form 990-T if the net income is less than $1,000?
A. No. However, if there is a loss the 990-T must be filed in order to offset the loss against possible future gains.
Q. Are you required to file if there is a net operating loss (NOL)?
A. No, however you forego the benefit of carrying that loss forward or back by choosing not to file. Filing the 990-T in the year there is a loss will enable the IRA to offset losses for up to two years looking back and up to 10 years carrying forward.
Q. What is the difference between long-term and short-term capital gains?
A. Long-term capital gains apply to assets that are held for over 12 months. Short-term capital gains apply to investments that are acquired and sold in less than a 12 month time frame. Taxes are generally lower for long-term capital gains than short-term capital gains.
Q. Is the 990-T separate from the individual tax return?
A. Yes. The IRA will IRA will need to establish its own EIN to file 990-T. This number separates the IRA from the owner’s Social Security Number, which is used in the individual tax return. The IRS will more easily be able to separate your individual tax filings from the IRA’s tax filings. The 990-T is a separately filed return, though due at the same time, and should not be combined with that of the IRA owner’s individual return.
Q. Can I file an extension for the 990-T?
A. Yes. If an extension is required the extension extends the filing deadline until July 15th. The first extension is automatic, whereas an additional extension, if needed, must be approved. This would push the date back to October 15, of the year the taxes are due to be filed. It is important to remember that the extension is only for filing, it is not an extension to pay any estimated tax due.
Q. Is UBIT applicable with a Roth IRA?
A. Yes. Even though the Roth IRA grows gains tax-free, UBIT rules still apply to certain investments held within the Roth IRA account.
Q. Are there any retirement accounts that are excluded from UBIT?
A. Solo 401(k) accounts are not subject to UBIT from debt-financed real estate but are subject to UBIT from an LLC or LP investment. The UBTI amount from an LLC or LP investment is shown on the K-1 tax form sent to the IRA investor.
Q. Are UBTI and prohibited transactions the same?
A. No. UBTI is income that may generate a tax due, in an otherwise tax advantaged account. Prohibited transactions will disqualify the tax-exempt account and will result in the loss of the tax-exempt status.
Q. If an investment creates a taxable event, why include it in the IRA?
A. There are several reasons investors choose to put IRA dollars into an investment that will trigger a UBIT event. First, if the return on that investment, even with the taxes, will produce a higher return than a non-taxable investment. Second, many investors have large balances within retirement accounts due to company matches and a long term investment strategy. If the taxes due or penalties for early withdrawal apply, placing funds in an investment within a retirement account that triggers UBIT may be worth the taxes owed. Third, is to evaluate re-investment opportunities. For investments made outside of an IRA or other tax-exempt account, each investment must pay taxes over and over again on all gains. Within the IRA you have the choice of re-investing gains in non- taxable instruments, keeping the UBIT to a minimum.