A Brief History of UBIT and IRAs
Unrelated business income tax/taxable income (UBIT/UBTI) is a provision added to the Internal Revenue Code by Congress in the Revenue Act of 1950 to eliminate an unfair competitive advantage enjoyed by exempt organizations and entities over their taxpaying counterparts in the non-exempt world. This provision was later amended to also include IRAs and other tax-exempt retirement accounts.
The catalyst for UBIT was Mueller Macaroni which, at the time, had been donated to New York University (NYU) Law School, a tax-exempt organization. Prior to UBTI, the income derived from the sale of those noodles went tax-free to NYU.
(Interestingly enough, prior to the Revenue Act of 1950, non-profit/ charitable organizations in the United States generally did not pay income tax on income from any of their activities.)
The result of the Revenue Act of 1950 was that certain investments owned within a non-profit/tax-exempt entity (later amended to include retirement accounts such as Roth IRAs, Traditional IRAs, SIMPLE IRAs, SEP IRAs, etc.) must consider UBIT depending on the investment selections.
As it pertains to retirement accounts, UBIT investments typically fall into the category of debt-financed real estate or other property and investments in “flow-through entities” such as Limited Partnerships and Limited Liability Companies.
For more information on what investments incur UBIT, please see the When Does UBIT Occur? page.
UBIT Professional is here to take the confusion out of UBIT so that you can continue to focus on the profit-making potential of your investment strategies, even when UBIT is factored into the equation.