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:
Here are some other important factors to bear in mind regarding UBTI and UBIT:
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 firstname.lastname@example.org.