How do I pay Unrelated Business Income Tax (UBIT) or Unrelated Debt-Financed Income (UDFI)?

When investing through a Self-Directed IRA (SDIRA), account holders need to be aware of potential tax liabilities that arise from certain types of income, such as Unrelated Business Income Tax (UBIT) and Unrelated Debt-Financed Income (UDFI). These taxes are assessed when an IRA engages in activities that are unrelated to the primary purpose of the retirement account or when debt-financed investments are involved. Here’s how to handle UBIT and UDFI payments for your SDIRA.

What is UBIT?

UBIT is a tax applied to income generated by activities that are unrelated to the purpose of your SDIRA. If your IRA operates a business or generates income through an activity considered unrelated to the retirement savings purpose, UBIT may apply.

Examples of situations where UBIT might apply include:

• Operating a business within the SDIRA.
• Income from partnerships or LLCs that operate businesses unrelated to the IRA’s retirement purpose.

What is UDFI?

UDFI is a specific type of UBIT that applies to income generated from debt-financed property. If your SDIRA invests in real estate or other assets using borrowed funds, the income generated may be subject to UDFI.

For example, if your SDIRA purchases real estate using a mortgage, the rental income from the property may be subject to UDFI. The tax is calculated based on the portion of income attributable to the debt-financed portion of the property.

How to Pay UBIT or UDFI

1. Determine if UBIT or UDFI Applies:
   Before making a payment, assess whether your IRA is subject to UBIT or UDFI. Review the type of income your IRA has generated and whether it stems from a taxable business activity or debt-financed property.

   • UBIT Calculation: UBIT is typically calculated based on the net income from the unrelated business activity, after deducting allowable expenses.
   • UDFI Calculation: UDFI is calculated based on the portion of income that is attributed to the debt-financed portion of an investment.

2. Complete IRS Form 990-T:
   To report UBIT or UDFI, you will need to file Form 990-T with the IRS. This form is used to report income subject to UBIT or UDFI. It is the responsibility of the account holder, not AET, to file Form 990-T.

   • Filing Form 990-T: The form must be filed directly by you or your tax professional by the due date of your SDIRA’s tax return. This will include the calculation of the UBIT or UDFI and the payment of the tax due.

3. Paying the Tax – Using a Direction of Investment (DOI):
   After calculating the tax liability, you can make your UBIT or UDFI payment via a Direction of Investment (DOI). This allows you to authorize the payment of the tax directly from your SDIRA. The tax must be paid using funds from your SDIRA, and it is important to ensure that your SDIRA has sufficient funds to cover the tax due.

   • Payment Method: Submit the payment through the DOI by logging into your AET account. The payment will be processed using the available balance in your SDIRA.

4. Monitor Your Payment:
   Once the payment is submitted, ensure that it has been processed correctly. It's essential to keep track of your tax payments and ensure that your SDIRA is in compliance with IRS requirements.

Important Considerations

• AET Does Not File Form 990-T: Please note that AET does not file Form 990-T on behalf of clients. It is your responsibility to file this form directly with the IRS.
• Consult a Tax Professional: UBIT and UDFI can be complex, and calculating the correct amount of tax due requires understanding the nature of your income and investments. It is highly recommended to consult with a tax professional who can assist with determining whether your SDIRA is subject to these taxes and help with the proper filing and payment.

Conclusion

Paying UBIT or UDFI is an important aspect of managing a Self-Directed IRA that generates income from unrelated business activities or debt-financed property. By filing Form 990-T and making payments through a Direction of Investment (DOI), you ensure that your SDIRA remains in compliance with IRS tax requirements. Always consult with a tax professional for assistance with calculations and to make sure that all obligations are properly met.