Understanding The UBIT & Proper Paperwork Is Vital
UBIT, as it relates to IRAs, is the tax on profit earned from a business that is owned by an IRA or a non-recourse loan inside your IRA.. An IRA is a tax-deferred (traditional IRA) or tax-free (Roth IRA) retirement plan. By running a business through your IRA, you are giving that business special, tax-exempt privileges that a normal business would not receive. The IRS created UBIT as a way of taking away those unfair advantages from an IRA owned business.
Examples of passive income in an IRA are earnings from investments, dividend income or interest from loans. These are not subject to UBIT but if your IRA is earning profit from operating a business and has not paid tax on these profits, you will be taxed on those at the trust tax rate.
Understanding IRA Owned Businesses
This doesn’t necessarily mean that having a business in your IRA is a bad idea; it’s just something to consider if you plan on having a business in your IRA. The IRA must follow the same rules that any tax-exempt entity would follow. For example, a university that runs a convenient store for students on campus. The university is a tax-exempt entity, so all tuition and fees are not taxed. However, the convenience store creates income outside of the tax-exempt status, so the university must pay UBIT on the income generated from the store.
Each year, the IRS publishes the new trust tax rates which may be seen on their website, which is IRS.gov or you can talk with your CPA or a tax professional. They can help you out with this. Once you find the trust tax rate, fill out Form 990-T, then send it to the IRS along with any tax payments due. Your CPA or a tax professional will help you out with this.
Defining Leveraged Real Estate For UBIT
If you have leveraged real estate investments, UBIT will be charged as well. For example: If you have a non-recourse loan on a piece of property in your IRA, the debt financed portion of that property’s profits is subject to the unrelated business income tax.
If you have other questions on UBIT I would suggest speaking with a CPA or a tax professional.
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