Self Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS only describes the type of investments that are prohibited, which are very few.
Many investment experts expect a strong worldwide growth in demand for oil and believe this as the driving force behind the sharp price increases seen over the past years. It also indicates that factors influencing this upward trend in prices include: (i) Fluctuating pricing and supply from OPEC member countries, (ii) Economic and political instability in many oil producing countries, (iii) Population increases with requisite rises in energy use (particularly in India and China), and (iv) Supply disruptions caused by weather events such as hurricanes.
Over the last several years, a number of Self Directed IRA investors have turned to oil and gas partnerships, which provide investors the opportunity to participate in the oil and gas industry and balance their portfolios, increase the Rate of Return and reduce risks through diversification. These drilling funds are often registered with the Securities Exchange Commission and are registered in all states they are sold in (Blue Sky registration with your State Securities Department within 15 business days) and are also designed to accept both Sophisticated Investors and Accredited Investors.
In most cases, royalties generated by the oil and gas investment project would be exempt from tax as IRAs are not subject to tax pursuant to IRC 408. However, if the IRA engages in an active trade or business or used is leverage, income from that investment could be subject to tax. The tax is generally referred to as the Unrelated Business Taxable Income Tax or Unrelated Debt Financed Income tax in the case of leverage. The tax rates mirror the trust income tax rates which are generally 35%. Pursuant to Internal Revenue Code Section 512, royalties, including overriding royalties, and all deductions directly connected with such income shall be excluded in computing unrelated business taxable income. However, for taxable years beginning after December 31, 1969, certain royalties from and certain deductions in connection with either, debt-financed property (as defined in section 514(b)) or controlled organizations (as defined in paragraph (1) of this section) shall be included in computing unrelated business taxable income. Mineral royalties shall be excluded whether measured by production or by gross or taxable income from the mineral property. However, where an organization owns a working interest in a mineral property, and is not relieved of its share of the development costs by the terms of any agreement with an operator, income received from such an interest shall not be excluded. Thus, as long as the royalty income from the mineral investment is measured by the production of income and is relieved of its share of the development costs, the royalty income would not be subject to the Unrelated Business Taxable Income tax. Whereas, if the exception pursuant to IRC 512 is not satisfied, the income from the oil and gas investment partnership would likely be subject to the Unrelated Business Taxable Income tax.