The IRS grants a specific deduction on the first $1,000 of net income from UBTI sources to be kept without tax implications. For net unrelated business taxable income greater than $1,000 UBIT is owed and is taxed at the trust rates. While these rate schedules change from year to year, the current schedule for the 2016 tax year is as follows:
Unrelated Business Income Tax Rate Schedule
|Over||But not over—||The tax is:||Of the amount over|
|2,550||$5,950||$ 382.50 + 25%||$2,550|
|$5,950||$9,050||$1,232.50 + 28%||$5,950|
|$9,050||$12,400||$2,100.50 + 33%||$9,050|
|$12,400||—–||$3,206 + 39.6%||$12,400|
The trust tax table is condensed, which results in a higher tax rate than the corporate tax rate or the personal tax rate.
Specific circumstances that relate to UBIT include the following:
- If the IRA is eligible for the rates on net capital gains, rather than the trust rates, calculations are completed on Schedule D and reflected on Form 990-T.
- Capital gains rates will apply for gains from the sale of property that is debt financed. The trust tax rates in the chart above apply to properties held for 12 months or less and the long term rate ranging between 0 and 20% applies to property held over 12 months. Capital gains would apply to the debt financed net income from the sale of the property.
- If the return is filed late and there are taxes due, then interest and penalties will normally be assessed by the IRS as well. A late filing penalty of 5% of the unpaid tax is charged for each month or partial month the return is late up to a maximum of a 25% penalty.
- If the taxes are paid late, there is a late payment penalty. This fee is usually ½ of 1% of the unpaid tax for each month or partial month that the tax remains unpaid. There is a maximum penalty of a 25% of the unpaid tax.
- These penalties can be waived if the IRS determines the reasonable-cause criteria have been met. This can be accomplished by replying to the penalty notice with an explanation, but do not include the explanation when you file the return.
- Estimated tax payments are required if UBIT is expected to be $500 or more for the tax year. There is a tax penalty assessed for underpayment if the required quarterly filings are not made.
- Each state handles UBIT differently, making it necessary to determine your state of residence requirements for filing. Currently 40 states require a state filing if a Form 990-T is filed with the IRS. It is also important to note that some states do not require state income 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).
The procedures for filing UBIT, as well as the tax schedule to use, can be found on the IRS Instructions for Form 990-T or on Internal Revenue Service Publication 598. These documents provide the specific details and language the IRS uses to determine UBIT.