Does your self-directed IRA hold a stake in a business whose operating income taxes are passed through to investors? Did your account earn rental income from financed real estate? In either case, you may have received a Schedule K-1 that describes earnings generated under the aforementioned circumstances. Your individual retirement plan may owe unrelated business income tax (UBIT) on these earnings.
To help determine possible UBIT involved with your alternative IRA investments, reference the figure on the Schedule K-1 and, if necessary, file a Form 990-T on behalf of your IRA. Part III, Box 1 of a Schedule K-1 will show operating business income attributable to your investment, while Box 2 will show rental earnings attributable to debt leverage. As with any taxable event, the IRS may assess penalties and interest for late or missing Form 990-T filings. It would therefore behoove you to address any UBIT concerns related to your self-directed retirement plan, especially if you receive a Schedule K-1.
Let’s review some frequently asked questions about UBIT and filing a Form 990-T.
As discussed above, any earnings yielded by a pass-through operating business will be classified as unrelated business taxable income (UBTI) and may be subject to UBIT. Leveraged real estate may generate unrelated debt financed income (UDFI) in this same regard. The “investor” would be your IRA in this case, meaning the account itself may have to pay UBIT in accordance with these earnings.
Form 990-T must be filed if UBTI or UDFI exceeds $1,000 for the tax year. Please note that the Schedule K-1 could bear a negative number. Obviously, you hope your IRA investments will generate positive returns, but consider filing the Form 990-T even in the event of a net loss. UBIT on future gains can be offset by losses from prior years, so reporting those losses can help reduce your tax burden down the road.
The IRS views your retirement plan as its own taxpayer. As such, your IRA will file the Form 990-T and pay UBIT as an independent tax entity even though you, the IRA holder, are the engine behind the IRA's actions. You would file the Form 990-T separately from your individual tax return, and you may not use personal, non-retirement funds to pay UBIT owed by your self-directed IRA account.
Your IRA has until the tax filing deadline to pay UBIT for a given year. Because the plan itself must pay these taxes, please contact New Direction Trust Company to request a prompt and secure tax submission via our electronic federal tax payment system.
Your tax professional or certified public accountant can guide you through the filing process. You may also contact our sister company, IRA Tax Services, for assistance with submitting a Form 990-T. Please remember that your Form 990-T must be signed by a New Direction Trust Company authorized signer following your approval.
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