UBIT (Unrelated Business Income Tax)

If your IRA owns an asset or interest that produces unrelated business taxable income (UBIT), your IRA may be subject to an unrelated business income tax (UBIT) pursuant to Section 511 of the Internal Revenue Code.
 
Is My IRA Responsible for UBIT?
 
UBIT applies if ALL of the following are true:
  • Income is derived from "trade or business" activity (i.e., sale of goods and services).
  • Business activity is not substantially related to exempt status.
  • Business is regularly carried on by organization.
Generally, IRA investments that can generate UBIT include limited partnerships, limited liability companies, and any investment that incurs debt financing and/or is involved in an unrelated business.
 
Most passive investment income—including dividends, royalties, and rent—is exempt from UBIT. However, an investment that generates income with debt financing (e.g., purchasing real estate with a non-recourse loan in an IRA) is responsible for UBIT in direct proportion to the gain/income that's debt financed.
 
Payment of UBIT
 
In most cases, IRAs that receive more than the current $1,000 UBIT exclusion must file Form 990T with the Internal Revenue Service on or before the April 15th deadline. Form 990T payments must be made from the IRA's assets, and Equity Trust must receive direction to pay these taxes at least 10 days before the due date (plus any extensions).
 
IRAs that generate less than $1,000 of UBIT are not required to file Form 990T.
 
In most instances, UBIT is reported on Schedule K-1, which is prepared by the investment sponsor.
 

Please Note: This information is presented for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with legal, tax, and accounting professionals.