Unrelated business taxable income (UBTI)

A tax on business income could impact your retirement account.

You may think the only time there would be taxes on an IRA or another type of retirement account would be when you take withdrawals or distributions. It is possible, however, that certain income received in retirement accounts, which are tax-exempt entities, could be taxed before that.

What is UBTI?

Unrelated business taxable income is income earned by a tax-exempt entity, such as an IRA, that is not related to the exempt purpose of the tax-exempt entity. The exempt purpose of an IRA is to provide for the retirement of the IRA holder.

Let's say, for example, you own an oil drilling partnership in your IRA, and the drilling equipment owned by the partnership is leased to another company to use. This rental income would be considered UBTI.

UBTI tends to be generated by the following types of investments:

  • Limited partnerships (LPs)—businesses owned by more than one person, with limited liability to the owners for business debt
  • Master limited partnerships (MLPs)—a type of LP that is publicly traded and often found in the energy sector

When an IRA is invested in an MLP or LP, it becomes a partner in the partnership. This is an ownership interest in the partnership. Becoming an owner (in part or in full) of a business (such as an MLP or LP) is not considered within the exempt purpose of the IRA. MLPs and LPs may generate taxable income in a retirement account if the partnership borrows money, also known as using leverage.

Tax considerations

An IRA is an exempt entity separate from the beneficial owner of the IRA and can be subject to taxation on its own. UBTI is subject to taxation in all varieties of retirement accounts, such as IRAs, retirement plans like Keoghs, and health savings accounts (HSA). When total positive UBTI across all applicable investments held in a retirement account equals $1,000 or more, then Form 990-T must be filed.

Preparation and tax filing

  • As custodian, Fidelity will complete and file Form 990-T on behalf of your retirement account.
  • We will pay any resulting taxes, penalties, and interest from available cash in your account.
  • Any amounts remitted from the account to pay this tax will not be reported as a taxable distribution on IRS Form 1099-R.
  • Review any net operating losses (NOLs), MLPs, or LPs with your tax advisor. This information may reduce your tax liability. Any additional information may be submitted to Fidelity using the Supporting information for Form 990-T filing (PDF) form.

Mail completed forms to:

  • Fidelity Investments
    PO Box 770001
    Cincinnati, OH 45277-0060

Failure to file Form 990-T and pay any required unrelated business income tax (UBIT) by the IRS filing deadline can result in penalties.

We will notify you next year if your retirement account is required to pay UBTI for the applicable tax year.

Taxation related to UBTI can be complex. Depending on your financial situation and goals, having retirement accounts invested in UBTI-generating entities may or may not be to your advantage. Consult a tax advisor on this issue and others related to UBTI.

Frequently asked questions

  • Why did I receive a letter about the 990-T form?

    You received a letter because you hold an interest in master limited partnership (MLP) or limited partnership (LP) product in either a retirement account or a health savings account and your account holdings are being reviewed for a potential 990-T filing.

  • Why is Fidelity filing Form 990-T for my IRA?

    According to the IRS instructions for Form 990-T, custodians of IRAs are required to file form 990-T on behalf of all custodied IRAs that have a filing obligation.

  • What if my account doesn't hold any alternative investments?

    The 990-T filing is not limited to alternative investments. It includes master limited partnerships (MLPs), or publicly traded LPs, and limited partnerships (LPs), or privately traded LPs (i.e., not on NYSE, AMEX, etc.), held in retirement accounts or health savings accounts. While uncommon, other investments such as real estate investment trusts can also sometimes meet these criteria.

  • Is it guaranteed that my retirement account has an IRS filing requirement and tax payment obligation?

    Not necessarily; when total positive unrelated business taxable income (UBTI) amounts across all applicable partnership securities held in a retirement account equal $1,000 or more, then Form 990-T must be filed.

  • How do I know if I earned at least $1,000 in unrelated business taxable income (UBTI)?

    To determine if you've earned UBTI, review the following details on your Form K-1:

    • UBTI from operating results of the MLP or LP (typically reported on line 20-V of Form K-1).
    • Ordinary gains (MLPs only) generated from the liquidation of the partnership interest are 100% reportable as UBTI on Form 990-T.
    • Unrelated debt financed income (UDFI). UDFI is the portion of the gains associated with a sale/liquidation of a partner's interest in a partnership or proceeds from a taxable corporate action that is attributable to the acquisition indebtedness, commonly referred to as debt-ratio (this information is obtained directly from the partnership).
    • Income from cancellation of debt.
  • What will be reported on the 990-T?

    The total amount of positive unrelated business income (UBI) earned by the retirement or health savings account will be reported on the 990-T. This is reduced by allowable deductions such as 199A qualified business deduction and net operating losses as well as a $1,000 specific deduction. UBTI is UBI less the allowable deductions. See the Form 990-T instructions for more details.

  • Will I need an Employer Identification Number (EIN)?

    Yes, the IRS requires a separate EIN for each entity required to file Form 990-T. When an IRA is required to file Form 990-T, an Employer Identification Number must be obtained for tax filing purposes. The account owner's Social Security Number cannot be used for this filing as the account owner is a different taxable entity.

  • Does this affect my non-retirement account(s)?

    No, 990-T filings will not be made for your non-retirement accounts.

  • How will I be informed throughout the 990-T filing process?

    Where applicable for accounts that are included in various stages of the 990-T filing process, we'll send you the following notifications, as necessary:

    • Initial notification letter, identifying which accounts and securities are under review for a potential 990-T filing.
    • Notification of the Employer Identification Number (EIN) assigned and when 990-T extension (Form 8868) has been filed on your IRA's behalf.
    • Notification 990-T filing and tax payment due, when applicable.
    • Notification 990-T has filed but the full payment could not be made due to insufficient funds.
  • How is the tax payment made?

    The tax payment must be made out of the account that holds the MLP or LP (inclusive of alternative investments) that generated the unrelated business taxable income (UBTI). The payment is made directly to the IRS and will not be reported as a tax reportable distribution on IRS Form 1099-R.

  • How is the tax liability calculated?

    Several data elements are used to calculate the unrelated business income tax (UBIT) amount including total UBTI, deductions, and the trust tax rate. The most up-to-date trust tax table can be found on IRS.gov. These calculations are complex, and you're encouraged to review Form 990-T with your tax advisor.

  • How will I know if a tax payment is due?

    If Fidelity determines that your retirement account has a tax payment obligation, you will receive a letter outlining the tax amount due with a copy of the IRS Form 990-T that will be filed with the IRS.

  • When will the tax, penalties, and interest due to the IRS be paid?

    Tax payments are made on the date your Form 990-T will be filed with the IRS. This date will be noted in the tax payment letter. Payments will be made as nonreportable distributions via bank wire directly to the IRS and will reflect in Orders & History as a "partial transfer of assets."

    Note: Internal Revenue Notice 2020-18 as amplified by Notice 2020-23 extended the tax filing deadline for tax returns due between April 1, 2020 and July 15, 2020. Any tax filings or payments due between those dates are automatically extended to July 15, 2020. As a result, any penalties or interest on amounts due will not begin to accrue until July 15, 2020.

  • What if there is not enough cash in the account to pay the tax?

    Fidelity will still file Form 990-T with the IRS. Penalties and interest will continue to accrue after the failed payment attempt. If you make funds available after the payment due date, contact Fidelity to help facilitate a payment.

  • Is the plan sponsor or the participant responsible for paying the tax on Fidelity Retirement Plans (Keoghs)?

    The plan sponsor is responsible for the tax liability, but the payment will be taken from each participant's account.

  • What if I believe the K-1 is inaccurate?

    The K-1 tax form is sent directly by the partnership, and is not a Fidelity tax form. If you have questions about your LP K-1, you must contact the general partner or the partnership. If you believe your retirement MLP K-1 is inaccurate, contact Fidelity. Fidelity cannot review nonretirement account MLP K-1s. You need to contact the firm that services the partnership. Nearly all MLPs are serviced by either PricewaterhouseCoopers or Deloitte.

  • What if I believe Fidelity's 990-T filing is inaccurate?

    Please contact your tax advisor to review your 990-T filing and provide any specific questions to Fidelity, as necessary. Fidelity will help facilitate any necessary amendments. Please do not request that your tax advisor file an amendment on your behalf.

  • Can Fidelity process a Form 990-T amendment?

    If new information is received from the partnership or account owner of the IRA that would impact the tax liability, then Fidelity Management Trust Company (FMTC) will prepare an amended 990-T filing. Per the IRS, amendments should not be filed within 60 days of the original filing. Due to recent communicated delays at the IRS, the amendment process can take in excess of 6 months to complete. If the amendment results in a refund, the IRS will send a refund with applicable interest to FMTC for deposit into the retirement account as a nonreportable contribution.

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