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 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 previously discussed, 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 you may consider filing the Form 990-T even in the event of a 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, as the IRA holder, are the engine behind these actions. You would file the Form 990-T separately from your individual tax return, and you may not use personal funds to pay UBIT owed by your self-directed IRA account.
Your IRA has until the tax filing deadline (April 17, 2018 for the 2017 tax year) to pay UBIT for the previous year. Because the plan itself must pay these taxes, please contact New Direction IRA 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 Form 990-T filing process. You may also contact our sister company, IRA Tax Services, for assistance with filing a Form 990-T. Please remember that your Form 990-T must be signed by New Direction IRA following your approval.
For more information about self-directed IRAs and to discuss potential UBIT scenarios within your account, please don’t hesitate to contact our office.
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