IRAs and Unrelated Business Income

Posted by Lee Reams Sr. on

Generally an IRA is exempt from all income taxes.  An exception to that is tax on unrelated business income (UBI), which the IRA received from activities that are not substantially related to the functions for which the IRA is allowed an exemption from income tax, such as engaging in a business normally carried on for profit.

The taxation of UBI applies to all exempt entities, and besides Traditional IRAs, includes Roth, SEP, Simple, Coverdell, Archer MSA and HSA Accounts.

A specific exemption of $1,000 applies to UBI, so where the UBI is $1,000 or less no return need be filed.  Where the UBI exceeds the $1,000 exemption, Form 990-T is used to pay the UBI tax.  The UBI tax is determined using a graduated rate schedule (same as for trusts for IRAs or other exempt entities) – 15% to 39.6%. 

The due date of the 990-T is the same as for 1040s and Form 8868 can be used to apply for an extension.