Unrelated Business Taxable Income

[jane123]

Are there any circumstances that would allow the IRA owner to pay the UBTI tax out of poket/ In other words, must this payment to the IRS always be take from the IRA?

Question # 2. What happens if the IRA transferred out before the payment was deducted from the account or if the IRA does not have sufficient balance to pay the tax?

PS. Same question duplicated on SEP board- just want to make sure I cover the bases

http://www.benefitslink.com/boards/index.php?showtopic=21107

Thanks in advance for your help

[jevd]

My understanding is that any direct payment by the IRA participant from personal funds would probably be considered a contribution to the IRA and if the IRA owner was ineligible to make additional contributions for that year they would be subject to any excess contribution penalities and subsequent tax issues if not withdrawn.

Question # 2. If the tax was not paid, the IRA would be subject to interest and penalities for non-payment.

These are the issues that must be considered BEFORE an IRA participant invests in assets that generate UBTI.

[Guest Derelict]

I would agree with jevd.

Most people look at me like I have a tree growing out of my head when I mention that their IRA probably owes taxes...

These alternative investments seem to be increasing in populartity of late, and people just do not know the ramifications of holding such investments. The brokers generally do not know or are reluctant to mention UBTI. Custodians most likely will make you sign off saying that the IRA may be subject to UBTI, est. taxes, 990-T filing..etc., but who really reads that?

[mbozek]

Ubit is only assessed if the amount of the tax exceeds $1000. Since an IRA is taxed at the rate for a trust there would be no UBIT tax due if the gain was less than about $6850.

[jevd]

MBOZEK is correct. Check instructions for form 990 T. In addition, in some cases prior years losses may be used to reduce current year gains as long as prior 990Ts were filed. I'm not an accountant so have your client check with their tax professional.

[Guest Derelict]

OK now I'm confused

(My standard answer to UBTI questions is "Seek a qualified tax professional" )

From Instructions to form 990-T under "Who Must File" Section:

- Fiduciaries for the following trusts that must have $1,000 or more of unrelated trade or business gross income must file form 990-T:

-IRAs

-SEPs

-SIMPLEs

-Roths

-CESAs

-MSAs

This appears to indicate gross income of 1k not taxes due of 1k...

I leave this stuff to the CPA's but I'm curious anyways...

[Belgarath]

Derelict - I also had understood (maybe incorrectly) that there was a 1,000 INCOME exemption. So I'll wait to see what the CPA's here say.

[WDIK]

My understanding was the same as Belgarath and Derelict.

P.S. I'm not a CPA.

[Appleby]

I am not a CPA. But I do know that there is a $1,000 exemption. This UBTI has nothing to do with the IRA owner's other taxable income. In fact, the UBTI is reported under the individual’s EIN, not their SS#…

If the UBTI exceeds $1,000, the IRA custodian files IRS Form 990T (along with filing form SS4 for those IRAs that does not already have a EIN).

The IRS then responds to the IRA custodian indicating the amount of taxes owed by the IRA.

The Custodian then debits the IRA for the taxes owned and remits the amount to the IRS.

jevd is correct that prior year losses can be deducted. A Custodian may, before submitting the information to the IRS, inform the IRA holder of the amount of UBTI. The IRA holder at that point may provide documented proof to the Custodian of prior losses along with instructions to deduct these losses from the current UBTI. Even without receiving this notification from the Custodian, the IRA owner should be able to determine the UBTI for the year (but how may IRA owners even know what this is or the implications? Not many). This is why the notification from the Custodian would be helpful, especially if it includes an explanation of UBTI and the process.

[mbozek]

Sorry, the UBTI exemption is for $1000 of UBIT income not UBIT tax.

[Mary Kay Foss]

I wish that more IRA owners were aware of the UBIT. Even with the $1,000 exemption and the ability to deduct prior losses, the tax can add up because the compressed rates for trusts are used. Not only that, if the tax is over $1,000 there will be an underpayment penalty. IRS applies the corporate rules for making estimated tax payments; a corporation cannot rely on the fact that no tax was owed for the prior year.

Back to the original question. I have had clients who have paid the UBIT from their personal funds. We have relied on the old ruling that allows IRA expenses to be paid outside the IRA. This treatment doesn't deplete the IRA but doesn't give a tax deduction to anyone either.

[Appleby]

Hi Mary Kay,

I noticed you were away for a little while---good to have you back

Regarding the ability to pay UBI out of pocket, the IRS ruled in PLR 8830061 that this would be a contribution to the IRA as UBI is not administrative or trustee fees (which are the only IRA expenses that can be paid out of pocket…