Frequently Asked UBIT Questions
Taxation and Unrelated Business Income Tax are a small piece of the very large puzzle that is retirement planning. While it is important to consider any taxation on investments (as IRA owners understand), it is also important to keep it in perspective of the potential gains that can be achieved by the investment opportunity.
There are several reasons investors choose to put IRA dollars into an investment that will trigger a UBIT event. Debt financing often offers increased access to opportunities that may offer the potential for more returns that would have been unattainable had debt financing not been utilized. Real estate and entity investing are two areas that have the potential to provide profitable returns for investors, regardless of when UBIT is factored.
Additionally, investors may elect to invest in UBTI-generating investments if the return on that investment, even with UBIT, will produce a higher return than a non-taxable investment.
No. Unrelated Business Income Tax (UBIT) is not illegal or considered a prohibited transaction within retirement accounts, it is simply a tax that is incurred on certain IRA investments. However, some transactions that incur UBIT may also have plan asset or prohibited transaction issues that must be considered. Please contact us for more information.
Yes. Even though the Roth IRA grows gains tax-free, UBIT rules still apply to certain investments held within the Roth IRA account.
IRS Form 990-T and required supporting forms and schedules.
Yes. 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.
Anyone who has investments that are considered an unrelated business activity (like a LP or LLC) and/or contains debt financing within the tax-advantaged account and has net income of $1,000 or more, or wishes to file for a NOL.
The funds must be paid out of the IRA, not from the IRA owner’s personal funds.
April 15th the year following, just as other tax filings are required. Example: 2015 tax filings are due April 15, 2016.
Yes. If an extension is required the extension extends the filing deadline until July 15. The first extension is automatic, whereas an additional extension, if needed, must be approved by the IRS. If approved, this would push the due date back to October 15 of the year the taxes are due to be filed. It is important to remember that the extension is only for filing, it is not an extension to pay any estimated tax due.
To the IRS through the Electronic Federal Taxpayer Payment System (EFTPS). Since January 1, 2011 all payments are required to be made through this system.
No, however you forego the benefit of carrying that loss forward or backward by choosing not to file. Filing Form 990-T in the year there is a loss will enable the IRA to offset losses for up to two years looking back and up to 20 years carrying forward.
No. However, if there is a loss Form 990-T must be filed in order to offset the loss against possible future or prior gains.
Long-term capital gains apply to assets that are held for over 12 months. Short-term capital gains apply to investments that are acquired and sold in less than a 12 month time frame. Taxes are generally lower for long-term capital gains than short-term capital gains.