Revised on April 10, 2020 due to new guidance from IRS Notice 2020-23: Additional Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic, which, in part, extends the Form 990-T (for UBTI and UDFI) filing deadline.

IRAs are a great shelter for growing investments tax-deferred (in a Traditional IRA) or even tax-free (in a Roth IRA). However, there are instances in which the income produced by an IRA-owned investment can generate taxes, such as Unrelated Business Taxable Income (UBTI) and Unrelated Debt-Financed Income (UDFI). It’s important to know when your IRA may need to file IRS Form 990-T.

What is UBTI and UDFI?

Simply stated, UBTI occurs when a retirement account earns active business income, which is considered unrelated business income under federal tax law and is subject to its own tax.

UDFI occurs when a retirement account owns a real estate property that debt-financed (with a non-recourse promissory note) and the property generates income.

What Triggers UBTI and UDFI?

The most common triggers are:

•  If your investment is an LP or LLC structured as an operating company that produces income from selling goods and services.
•  If your investment is an LP or LLC that has obtained debt financing for the purchase of an underlying asset.
•  If your investment is real estate in which your IRA obtained a non-recourse loan to purchase real estate.

How to Know if UBTI or UDFI is Owed?

At the end of each year, the investment entity must report each investor’s financial information on a Schedule K-1 (IRS Form 1065). The investment entity should prepare and mail this directly to you (and will be forwarded to you in the event the K-1 is received by STRATA).

Generally, if the Schedule K-1 shows a gain or $1,000 or more generated during the year, IRS Form 990-T must be prepared and filed with the IRS on or before the July 15, 2020, filing deadline. However, even if Schedule K-1 shows a loss, you may want to consider filing Form 990-T because the UBTI on future gains may be offset by prior year losses, which can help reduce your tax burden in future years.

As with any IRS tax, the IRS may assess penalties and interest for late or missing Form 990-T filings.

Tips for Filing Form 990-T

1.  Keep these tips in mind to ensure your account is compliant with the IRS regulations.
2.  The account owner is responsible for determining if the filing of IRS Form 990-T is necessary – which is why account owners are advised to work with an experienced tax professional. As a custodian, STRATA does not advise or calculate UBTI or UDFI.
3.  Consult with your tax professional first to obtain an employer identification number (EIN) for your IRA by filing IRS Form SS-4.
4.  Once you obtain the EIN, you’ll need to complete IRS Form 990-T by early July.
5.  Send your completed Form 990-T to STRATA, along with your written instructions for us to pay the appropriate tax from your IRA. Remember to allow sufficient processing time for STRATA to meet the July 15, 2020 filing deadline.
6.  STRATA will process and file your Form 990-T tax form and payment. A $50 processing fee will be charged.

Payment of UBTI or UDFI Must Come from the IRA

The UBTI or UDFI tax must be paid from your IRA account. If the amount of gross UBTI/UDFI is less than $1,000, Form 990-T is not required to be filed. However, filing the form even if you have a loss, allows it to carry forward to subsequent years. Any income or loss shown on the K-1 for an IRA-owned asset should not be included or reported on your personal tax return.

Also, it’s important that the K-1 properly reflect STRATA’s tax identification number (TIN) of 26-2637994 rather than your social security number. Please notify us promptly if the K-1 does not reflect our TIN.

How to File Form 990-T for a STRATA Account?

1.  Consult with your tax professional first to obtain an employer identification number (EIN) for your IRA by filing IRS Form SS-4.
2.  Once you obtain the EIN, you’ll need to complete IRS Form 990-T.
3.  Send your completed Form 990-T to STRATA, along with your written instructions for us to pay the appropriate tax from your IRA.

STRATA will process and file your Form 990-T tax form and payment. A $50 processing fee will be charged.

For more information about UBTI and UDFI Tax Considerations for IRAs, please contact us at [email protected].