Unrelated Business Taxable Income (UBTI)

A tax on business income could impact your retirement account.

You may think the only time you'd pay taxes on an IRA or a retirement account would be when you take withdrawals or distributions, but it is possible before then for certain income received in retirement accounts to be taxed.

What is UBTI?

When a retirement account earns active business income, this is considered unrelated business income under federal tax law and is subject to its own tax.

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 investment vehicles:

  • 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

An IRA or retirement account may be invested in a business that generates UBTI.

Tax considerations

If unrelated business income is $1,000 or more per year, the IRS requires reporting of the UBTI on Form 990-T and the payment of excise tax.

Given how LPs, and MLPs, are structured, they're required to pay out most of their profits to investors.

If, for example, your retirement account is invested in an MLP that generates UBTI and the MLP distributes business profits to your retirement account, and UBTI of $1,000 or more is generated then:

  • 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 assets in your account

Any amounts remitted from the account to pay this tax will not be reported as a tax reportable distribution on IRS Form 1099-R.

Review any carry forward losses for MLPs or LPs with your tax advisor. This information (i.e. loss schedule, prior-year K-1 forms) 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 UBTI tax 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 a Master Limited Partnership (MLP) or Limited Partnership (LP) product in either a retirement account or a health savings account.

  • 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.

  • Does this letter mean I will owe unrelated business taxable income (UBTI) taxes to the IRS?

    Not necessarily: filing a 990-T and paying taxes on UBTI is required if you hold a Master Limited Partnership (MLP) or Limited Partnership (LP) in a retirement account or health savings account that generates $1,000 or more in UBTI, which is reported in Box 20-V of the K-1 tax form. The IRS requires reporting of the UBTI as income on the 990-T form, under an account specific employee identification number (EIN).

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

    Each Master Limited Partnership (MLP) reports your UBTI in Box 20-V of the Schedule K-1 tax form (#1065). A Limited Partnership (LP) may report the UBTI amount in the footnote of the K-1 form, if not in Box 20-V.

  • Will I need an employee identification number (EIN)?

    Yes, the IRS requires a separate EIN for each 990-T filing. You may not use your Social Security number, Tax ID number, or the Fidelity EIN or Tax ID number for this filing.

  • 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 generate at least $1,000 in unrelated business taxable income (UBTI), the following letters will be generated and mailed to your address of record:

    • Notification of employee identification number (EIN) being assigned
    • Notification 990-T extension (Form 8868) has been filed on your behalf
    • Notification 990-T has been filed and payment has been made
    • Notification 990-T has been 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 Master Limited Partnership (MLP) or Limited Partnership (LP) 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?

    The first $2,500 is taxed at 15%. Any amount over $2,500 will be taxed in a range between 15% and 40%. The IRS may also impose additional penalties and interest, if the taxes are paid after the April filing deadline. For more information, you may want to consult your tax advisor or refer to the IRS instructions for Form 990-T.

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

    If you have $1,000 or more of UBTI in a year, you should receive a letter in April, notifying you that Fidelity will be filing an extension on your behalf. This will be the first communication notifying you that you have an impacted account that is being reviewed for the 990-T process. Then, later in the year, you will receive a second letter from Fidelity containing the amount of excise tax paid, along with a copy of the 990-T Tax Form filed with the IRS.

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

    Tax payments are generally made during the months of July and October. Payments will be made as non-reportable 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 and send you a letter, notifying you that your account has insufficient funds.

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

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

  • What will be reported on the 990-T?

    The total amount of positive Unrelated Business Taxable Income (UBTI) of $1,000 or more earned by the retirement or health savings account will be reported on the 990-T.

  • Where is UBTI reported?

    UBTI is reported on the K-1 tax form. This tax form is generated by the partnership itself, not by Fidelity.

  • What is UBTI composed of?

    Total UBTI is made up of the following:

    • UBTI found in Box 20V or in the footnotes of the K1
    • Ordinary Gains found on the Sale Schedule of the K1
    • Capital Gains or Loss included in UBTI
  • What if I believe the K-1 is inaccurate?

    The K-1 tax form is sent directly by the Partnership, not by Fidelity. If you have questions about your LP K-1, you must contact the General Partner or the Partnership directly. If you have questions about your MLP K-1, you must contact the firm that services the Partnership. Nearly all MLPs are serviced by one of two companies, PricewaterhouseCoopers and Deloitte.

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

    Please contact your tax advisor.

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