The Unrelated Business Income Tax is owed by traditional or ROTH IRAs. When that’s the case form 990-T is to be filed by the custodian of the IRAs and the tax paid with IRA funds.
There is a $1,000 exemption. If the UBIT is less than $1,000, then no form is required to be filed and no tax paid for that year.
However, one owner of 1,365 units of Kinder Morgan Energy Master Limited Partnership had taxable income in his ROTH IRA of about $52,000. Since the tax rate goes up to 39.6 percent with only $12,000 of taxable income, his 2014 tax was about $18,484.
His custodian filed the form and paid the tax from his IRA. That reduced his IRA and was a surprise to the owner.
But about $6,000 of penalty for late filing, late payment and interest also was paid. The custodian is reported to not have enough time to file for an Extension of Time to File. It is indicated the custodian is asking IRS to cancel or abate the late filing penalty of 25 percent of the tax. IRS may cancel the penalty for “reasonable cause” of reliance on a competent professional.
The main point is there are many IRA owners that choose to invest in Master Limited Partnerships that have this unrelated business income that is taxable, even to an IRA. Unless the investment is fairly small, form 990-T is to be filed by the custodian.
We don’t see the benefit of that type of investment. What the MLP pays is not the taxable income, it includes in most cases a partial return of the investment that is not taxable. The tax basis (cost) of the investment is to be adjusted and reduced for any return of the principal investment. Then when it is sold, the basis is reduced and the gain is increased.
It seems the custodian, Pershing, filed about 5,000 late forms 990-T for year 2014. Unfortunately, the information needed to correctly file the returns is not always clear and complete from the Schedule K-1 that is received from the partnership.
Unless the investor is experienced and knowledgeable, this kind of investment might be best to only be done by those investing a large amount. We sometimes urge clients that only invest $10,000 or $25,000 in MLPs, to consider selling the investment. Reporting the income from MLPs is more complicated and takes more time to do correctly. More time in preparing the regular income tax return usually means more preparation fee or cost.
For those investors that are sold that kind of investment outside of the IRA, in a regular taxable investment account, this special tax applies and is to be paid (unless the unrelated business income is less than $1,000).
The surprise of paying tax on unrelated business income is no great joy.
Did you hear? “The afternoon knows what the morning never suspected,” by Swedish Proverb.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.
