With 2018 in the rear-view mirror, it may be time to starting thinking about the inbound tax filing deadline. Self-directed IRA investing can help make tax season a little more “fun” (did you get a nice tax deduction from your Traditional IRA contributions?), but your account may carry certain responsibilities depending on your IRA-owned alternative assets.
Specifically, your IRA may have to pay unrelated business income tax (UBIT) if it earned money through investments in an operating business or debt-leveraged property. Let’s explore this in more detail:
As mentioned above, your self-directed retirement plan will only have to pay UBIT under the following circumstances:
In either case, UBIT will only come due on annual net profits of $1,000 or more.
A pass-through entity would issue a Schedule K-1 for IRA investors to report the account's portion of the entity's annual profits. In Part III of the document, Box 1 describes ordinary business income, Box 2 describes rental income, and Box 3 describes non-real estate rental income. A properly prepared Schedule K-1 will also include a Code V in Box 20 to report UBTI for IRA investors.
If your IRA earns UBTI beyond $1,000, the IRS will require you to prepare and file a Form 990-T on behalf of your account to report the taxable earnings and pay any applicable UBIT. Always remember that UBIT payments must come from your IRA; you may not pay your IRA’s tax bill with personal, non-IRA money. Please see our Schedule K-1 blog and consult with your CPA or tax professional for more detailed information about this process.
As with any tax, your IRA would not have to pay the IRS if it takes a net loss on a UBIT-eligible investment. However, because a net loss in a given year may offset positive earnings in a future year, it may be worth filing the Form 990-T even if your account owes $0 in UBIT. For instance, if your IRA takes a $2,000 net loss in UBTI this year but nets a $5,000 profit next year, your IRA will only have to pay taxes on $2,000 (the $3,000 difference minus the $1,000 that the IRS disregards) as long as you report the net loss.
NDTCO’s sister company, IRA Tax Services, would be happy to assist you with filing a Form 990-T if your account owes UBIT for the 2018 tax year. For more information about self-direction and alternative IRA investments, please don’t hesitate to contact NDTCO at 877-742-1270 or firstname.lastname@example.org.