Each state handles UBIT differently, making it necessary to determine the requirements for filing in your state of residence or the state of residence for your clients. Currently only 10 states do not require a state filing if a Form 990-T is filed with the IRS. At this time those states include: New Hampshire, Kentucky, Nevada, New Jersey, Ohio, Pennsylvania, South Dakota, Texas, Washington, and Wyoming.
It is also important to note that some states do not require state income tax filings but do require UBIT (for example, Florida and Alaska). Some states also have minimum UBIT requirements regardless of a gain or loss (for example, New York, New Mexico, and Arizona).
So what controls are used for UBIT in regard to state filings? The situs of IRA owner, situs of IRA trustee or custodian, or situs of property? As I’m sure you understand by now, it depends.
- Generally, if income from unrelated trade or business derived from sources within the state, there may be a filing requirement (i.e. situs of property rule).
- If income derived from sources outside the state, but the trustee or custodian is resident of the state, there may be a filing requirement.
- Many states that impose UBIT apply some variation of the three-factor situsing apportionment formula based upon situs of income producing factors within the state as compared to their situs elsewhere: payroll, sales, and property.
- As you can see, there are few black and white rulings in regard to UBIT, especially when you get into various state regulations. It is important to research and understand the specifics for each individual investment and ensure that you are compliant with both IRS rulings and applicable state regulations.
IRAs seem to slip through cracks in some state laws where UBIT is imposed (NOTE: Tax agents or authorities are not always in agreement as to application).
- Tax imposed on trust income by reference to federal Form 1041, which IRAs do not file.
- However, if UBIT is imposed by reference to Internal Revenue Code Sections 511-514, then tax may apply.
- Certain states (e.g., Arizona, Colorado, Georgia, Minnesota, New York and Virginia) impose UBIT by reference to entities exempt from tax under IRC Section 501 or listed in IRC Sections 511(a)(2) & (b)(2), and although IRAs are subjected to the same tax as imposed by IRC Section 511 (by reason of IRC Section 408(e)(1)), IRAs are not listed in IRC Sections 501 or 511.
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.