What is UBTI?

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Unrelated business taxable income (UBTI) is operating income that can be earned by a retirement plan. UBTI could include rental income from non-real estate assets (regardless of debt leverage, provided they’re owned directly by the plan) or earnings yielded through an investment in a pass-through entity. A pass-though entity is a business that does not pay taxes at the corporate level. For instance, a business could earn a certain amount of operating income in a given year, pay corporate taxes, and then issue post-tax payments or dividends to their investors. A pass-through entity will instead bypass corporate tax payment and issue returns directly to investors. In turn, the investors inherit the tax responsibility, even if the investor is a tax-advantaged self-directed IRA.

As such, if your IRA earned operating income from a pass-through entity, your account may owe unrelated business income tax (UBIT). The pass-through entity in which your self-directed retirement account is invested should issue a Schedule K-1 to report the net UBTI gain (or loss) attributed to your IRA's investment. You may also consult with the managers or partners of the entity to help determine whether or not your IRA earnings qualify as UBTI. Potential pass-through entities that may accept investments from IRAs (or may be held as IRA assets themselves) include:

  • Limited Partnerships (LP) – These entities must include at least one general partner and one limited partner. The limited partner doesn’t play a significant role in business operations, so this individual may not be aware of the company’s tax situation.
  • Master Limited Partnerships (MLP) – These are sometimes known as publicly traded partnerships (PTP). Like stocks or mutual funds, self-directed investors may acquire publicly offered positions in MLPs and yield the benefits of partial ownership. However, just as stock positions may not provide insights into their parent companies, you may not know the tax model of an MLP.
  • Limited Liability Companies (LLC) – The personal assets of an LLC’s members may never be collected to satisfy the liabilities or debts of the company. This model tends to involve the direct participation of its members, so potential UBIT situations can be more apparent.
  • Limited Liability Partnerships (LLP) – Partners are responsible (still on a limited basis) for business liabilities or debts, but not amongst themselves. If a partner directly contributes to company debt, he or she may be personally culpable for repaying it. The other non-responsible partners would not be similarly obligated.

Here are some other important factors to bear in mind regarding UBTI and UBIT:

  • If you and your financial team determine that your IRA owes UBIT, you must file a Form 990-T on behalf of your account.
  • Your IRA may only owe UBIT on a net gain beyond $1,000. If your IRA earned $1,000 or less, your account may not have to pay UBIT.
  • A net loss of UBTI would not carry a tax implication, but losses in one year may offset earnings in a future year. It may therefore behoove you to file a Form 990-T on behalf of your account even if it took a net loss. Losses cannot offset earnings down the road if they're not reported.

As New Direction Trust Company does not provide tax advice, we encourage you to consult with your accountant or tax professional for any assistance you may need. Our sister company, IRA Tax Services, specializes in complex tax filings and would be happy to assist you in filing a Form 990-T. For more information about UBTI or the alternative IRA investments that may incur UBIT, please don't hesitate to give us a call at 877-742-1270 or send us an e-mail at info@ndtco.com.

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