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IRS Form 990-T, UBTI and UDFI

IRS-Form 990-T
3 Minute Read

IRS Form 990 2020 & UBTI & UDFI have all been updated for the taxable year and that means that there’s more to learn before taxes go out.

Key Points
  • IRS Forms Updated
  • Proper forms are vital for submitting correctly
  • UBTI form is for Unrelated Business Taxable Income

IRS Forms Updated

The IRS has redesigned IRS Form 990-T for the 2020 taxable year, also recently releasing drafts of the 2020 IRS Form 990-T, Exempt Organization Business Income Tax Return, and they have issued a draft format of new Schedule A (Form 990-T), Unrelated Business Taxable Income From an Unrelated Trade or Business. It is expected that the IRS will release a final version of Schedule A before the filing deadline of May 17, 2021.

Form 990-T is the tax form where a charitable organization or retirement account, such as an IRA or Solo 401(k), reports income that would be subject to the UBTI tax.

What Triggers UBTI Or UDFI?

In general, only income generated from an active trade or business (i.e. a store) via a pass-through entity (i.e. an LLC), margin, or real estate acquisition indebtedness would be subject to the UBTI tax. However, in the case of a Solo 401(k) plan, there is an exemption under IRC 514(c)(9) for any plan that generated income from a real estate investment involving a nonrecourse loan (real estate acquisition indebtedness). Note, most Self-Directed retirement investments would not trigger the UBTI tax. For example, any transaction that does not involve debt, and generates capital gains, interest, dividends, rental income, and royalty income would not trigger the UBTI tax and the requirement to file IRS Form 990-T.

Once you have determined that the UBTI tax rules will apply to Self-Directed IRA or Solo 401(k) plan investments, the next part is figuring out just how much tax will be due. If an IRA or 401(k) plan generates gross income subject to UBTI of more than $1,000 during the taxable year, the retirement account must file IRS Form 990.

IRS Form 990-T Filing Requirement

For Self-Directed IRA or Solo 401(k) plan investors who will have unrelated business taxable income or unrelated debt financed income in excess of $1000 after taking into account allowable deductions and expenses, such as depreciation, debt servicing, etc., the IRA would be required to file IRS Form 990-T, and Schedule A by May 17, 2021. Filers may request an automatic extension of time to file Form 990-T by using Form 8868, Application for Automatic Extension of Time To File an Exempt Organization Return.

The return must be filed by the IRA or 401(k) plan and not by the individual or plan trustee. In addition, the retirement account should acquire its own Tax Identification number if it does not already have one.

One new change in 2021, is that the IRA now requires mandatory electronic filing of the 2020 Form 990-T started in February 2021. Limited exceptions apply. Any Self-Directed IRA or Solo 401(k) must pay any tax due in full by the due date of the return without extension.

Generally, an organization filing Form 990-T must make installment payments of estimated tax if its estimated tax (tax minus allowable credits) is expected to be $500 or more. Both corporate and trust organizations use Form 990-W, Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations, to figure out their estimated tax liability. Tax must be paid by the retirement account.

NOLs

If your Self-Directed IRA or Solo 401(k) generates net operating losses (NOLs) in a current year from an unrelated business activity, including a real estate investment, involving real estate acquisition that has triggered UDFI in the past, losses from a current year can be used to offset UBTI income from a past year.

The 2020 CARES Act eliminated most NOL carrybacks and was changed to provide that losses arising in a tax year beginning after December 31, 2017, and before January 1, 2021 must be carried back to the five tax years preceding the tax year of such loss, which includes tax years prior to the enactment of section 512(a)(6). A Self-Directed IRA or Solo 401(k) eligible to carry an NOL back to a prior year must file an amended Form 990-T for that year. Form 1045 or 1139 can’t be used for this purpose; however, Form 1045 or 1139 may be attached to the amended Form 990-T to show the NOL computation. However, a retirement account can waive the CARES Act NOL carryback by attaching a statement to Form 990-T as described in Revenue Procedure 2020-24.

Any Self-Directed IRA or Solo 401(k) plan that generates $1000 or more of unrelated business taxable income or unrelated debt financed income after taking into account current deductions and any available NOLs, must file electronically IRS Form 990-T and Schedule A by May 17, 2021 and pay all required taxes. An extension can be requested; however, all available tax must be paid by the retirement account by May 17, 2021.

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