Based on IRS estimates, keeping the records for UBIT can take an average of 67 hours and 12 minutes a year. Learning about the law takes approximately 27 hours, preparing the form for clients consumes an average of 43 hours, and copying, assembling, and sending the form to the IRS takes an average of 4 hours. This doesn’t even include any applicable state forms that are required for 40 states.

As these numbers demonstrate, understanding and preparing the appropriate forms cannot be completed by visiting a single website.

However, understanding the basics provides the tools and resources needed to guide clients through the process. It also helps professional advisors understand when the laws are applicable and the process needed for compliance.

The following information references Internal Revenue Code Sections 511-514.

What Income is Included for UBIT Calculations?

Gross income derived from any unrelated trade or business regularly carried on – IRC Section 512(a).

What expenses are allowed?

• Expenses allowed are directly connected with carrying on such trade or business – IRC Sections 512(a); Reg. § 1.512(a)-1.

• To be “directly connected,” expenses must be proximately and primarily related to the business.

• Expenses, depreciation and similar items attributable solely to the conduct of the unrelated business activities are deductible if satisfy requirements of IRC Sections 162, 167, or other relevant Code provisions.

• Net operating loss (NOL) deduction per IRC Section 172, except that NOL for taxable year, NOL carryback or carryover to any taxable year, and NOL deduction for any taxable year are determined without taking into account any amount of income or deduction excluded in the calculation of UBTI – IRC Sections 512(b)(6), Reg. §§ 1.512(b)-1(e)  and 1.514(a)-1(b)(5).

What Tax Rates Apply?

• Corporate tax rates (under IRC Section 11) – IRC Sections 511(a)(1) & (2)(A) seem to indicate that those rates apply with respect to qualified retirement plans; however, the Instructions for Form 990-T (Line 36) indicate that they are taxed at trust rates.
• Estate and trust tax rates (under IRC Section 1(e)) apply with respect to any trust which but for its exemption from taxation under IRC Section 501(a) would be subject to taxation under the trust rules – IRC Section 511(b).
• Query – what rates apply to IRAs? Instructions for Form 990-T indicate that IRAs, SEPs, SIMPLEs, Roth IRAs, Coverdell IRAs (ESAs), and Archer MSAs are to be described as “Other trust” in Block G, thereby subject to tax at the less favorable trust rates.
• If the IRA is eligible for the rates on net capital gains, Schedule D (Form 1041) is completed and the applicable tax is computed from the Schedule D (Form 1041) and reflected on the Form 990-T.

Paying the Tax

Electronic deposits are required using the Electronic Federal Tax Payment System (EFTPS). To ensure a timely payment, the transaction must be initiated at least one day prior to the date the deposit is due.

Where to Turn For Assistance

The information above references the IRC in order to provide guidance for tax professionals, advisors and clients when determining the rules and the specific code pertaining to UBIT.

For application processes and understanding when and how the rules apply, UBIT Professional is here to help. Our services prepare the 990-T Form for our clients and help to answer questions about UBIT rule applications to ensure compliance with the IRC.

For a more in-depth look at how the process works, please see the Understanding the Process page. It is important to remember that the IRA will need to establish its own EIN to file Form 990-T. This number separates the IRA from the owner’s Social Security Number, which is used in the individual tax return. The Form 990-T is a separately filed return, though due at the same time, and should not be combined with that of the IRA owner’s individual return.