IRAs are subject to the unrelated business income tax

by | Apr 6, 2023

ARTICLE | April 06, 2023

Individual Retirement Accounts (IRAs) described in section 408 are subject to the unrelated business income tax (UBIT) to the extent their gross unrelated business taxable income (UBTI) exceeds $1,000.

IRA fiduciaries generally have the responsibility of filing Form 990-T, Exempt Organization Business Income Tax Return, but the tax liability belongs to the IRA.

What is UBIT?

UBIT is a tax imposed on the unrelated business income of exempt organizations, including IRAs. For IRAs and other trusts subject to UBIT, the trust tax rates apply (reaching 37% at $14,451 of income in 2023).

What is unrelated business income?

For IRAs, any income that is not excluded investment income generally will be unrelated business income. Typically, IRAs earn taxable income through investments in partnerships or LLCs with operating businesses (e.g., private equity funds, hedge funds, venture capital, publicly traded partnerships, and other alternative investment structures).

What is excluded investment income?

There are five common types of income that are statutorily excluded from unrelated business income:
  1. Interest
  2. Dividends
  3. Royalties (note that the provision of services in conjunction with the royalties generally taints all of the income)
  4. Rents from real property (note that the provision of services in conjunction with the rental activity generally taints all of the income)
  5. Capital gains
However, if borrowed funds are used by the IRA or the investment vehicle to generate any of the income, it generally will be taxable to the IRA.

What is unrelated debt-financed income (UDFI)?

If the IRA, directly or through a partnership or LLC investment, utilizes debt (whether recourse or non-recourse) to acquire or improve an income-producing asset, the IRA’s share of the income from that asset will be unrelated business income to the extent of the borrowing if not already considered UBTI. For example, if a real estate partnership borrows $400,000 to acquire a building for $1,000,000, 40% of the IRA’s allocable rental income from that building generally will be subject to UBIT.

How to identify unrelated business income?

Partnerships are required to provide sufficient information such that partners subject to UBIT are able to compute their tax liability. Specifically, Form 1065, Schedule K-1 contains a code “V” in Box 20 for partnerships to report this information. In addition, for 2022 Schedules K-1 furnished to IRAs, partnerships should also include code “AH” and provide the IRA’s EIN when there is UBTI.

How and when to report and pay the tax?

IRAs generally must file Form 990-T if they have gross UBTI in excess of $1,000. The return generally must be filed by April 15, unless extended to October 15 by filing a Form 8868 on or before the original due date.

Questions or Want to Talk?

Call us directly at 972.221.2500 (Flower Mound) or 940.591.9300 (Denton), or complete the form below and we’ll contact you to discuss your specific situation.
  • Should be Empty:
  • Topic Name:

This article was written by Alexandra O. Mitchell, Morgan Souza and originally appeared on 2023-04-06. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/services/business-tax/iras-are-subject-to-the-unrelated-business-income-tax.html

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

Using POD and TOD Accounts in Your Estate Plan

Nov 25, 2025

Discover how Payable-on-Death (POD) and Transfer-on-Death (TOD) accounts streamline the inheritance process, enabling beneficiaries to bypass probate and access assets swiftly. While these tools offer speed and cost-effectiveness, they come with potential pitfalls that could disrupt your estate plan if not carefully coordinated. Explore their benefits and drawbacks to ensure seamless asset distribution among your loved ones.

The Strategic Power of Charitable Lead Trusts: How Families Can Transfer Assets While Making an Impact

Nov 20, 2025

Charitable lead trusts offer families a powerful strategy to dramatically reduce estate taxes while transferring appreciating assets to the next generation and supporting charitable causes simultaneously. By leveraging today’s low interest rate environment, a $10 million CLT could potentially transfer $3.7 million or more to family members while creating a taxable gift of only $528,700. However, families must carefully weigh the substantial benefits against significant risks, including asset underperformance, irrevocable structure, and complex administrative requirements.

Maximizing Your Itemized Deductions Under the One Big Beautiful Bill Act: A Strategic Guide for 2026

Nov 18, 2025

The One Big Beautiful Bill Act has fundamentally reshaped the landscape of itemized deductions, creating both new opportunities and challenges for taxpayers who want to maximize their tax savings. While the SALT deduction cap increases to $40,000 and new charitable giving options emerge, taxpayers also face a new 0.5% AGI floor on charitable deductions and limitations that effectively cap itemized deduction benefits at 35% for high earners starting in 2026. Success under the new law requires strategic multi-year planning, including bunching deductions in alternating years and carefully timing major deductible expenses to avoid new limitations while maximizing available benefits.

Maximize Your Legacy While Minimizing Taxes: The Strategic Guide to Charitable Remainder Trusts

Nov 14, 2025

If you’re looking to support your favorite charitable causes while maintaining an income stream and achieving significant tax benefits, a charitable remainder trust (CRT) could be the perfect solution. This sophisticated estate planning tool allows you to convert appreciated assets into lifetime income while making a meaningful charitable impact—all while potentially saving thousands in taxes. Whether you hold highly appreciated stocks, real estate, or other valuable assets, a CRT offers a strategic way to diversify your holdings, reduce your tax burden, and create a lasting philanthropic legacy.

Scenario Planning: A Roadmap for Business Agility

Oct 28, 2025

In a world of constant change and unpredictability, scenario planning empowers businesses to anticipate multiple futures and make informed decisions. This strategic approach helps organizations manage risks, optimize resources, and stay agile amidst economic volatility, technological advancements, and shifting consumer preferences. Discover how scenario planning can transform your company’s resilience and growth potential.

What Are Opportunity Zones?

Oct 28, 2025

Timing is key in maximizing the benefits of OZ investments. With thoughtful planning and strategic execution, OZs can be a cornerstone of both financial success and meaningful change.