You may receive a K-1 report on earnings you have generated from investing in a partnership, typically real estate or another form of asset rather than a financial product. All K-1 income is usually taxable, but if your investments occur within your independent retirement account, you will likely find you can defer the tax like other investments in your IRA. You are responsible for reporting this information.
When it comes tax time, it is your responsibility to report any K-1 income information to the IRS. You also must include the K-1 documents and any related forms such as the 990-T with your tax return.
Background on K-1 Income
If you earned any income that would classify as K-1 income come tax time, your investment manager will supply you with a K-1 form. This form will arrive around the same time as other key documents like your 1099s and W-2s. However, many K-1 forms arrive late since they are more complicated than other tax documents. If you believe you may be missing a K-1, contact your asset manager to request the document prior to filing your taxes. Once you have gathered all your K-1 documents, separate those which apply strictly to your IRA earnings.
Unrelated Business Taxable Income
Unrelated business taxable income (UBTI) may be incurred on your account. This is a term to define taxable activity that occurs within a nontaxable account. Since an IRA is generally nontaxable until you withdraw money from it (with some exceptions), only the UBTI portion will be subject to taxation. You will know if you owe taxes on UBTI by reviewing your K-1 document. Look for Section 20, Code V, where you will find your UBTI on an investment. If the amount is greater than $1,000, you may owe taxes on this portion of your K-1 income.
Including Your K-1s with Tax Filings
When you send in your tax forms, include your K-1 documents. If you determine you owe money due to your UBTI, you must report this on Form 990-T, "Exempt Organization Business Tax Return." At times, your plan provider will have already filled out Form 990-T for you if the provider is aware you will incur taxable income. You can ask your plan provider for assistance if you are uncertain of how to fill out the 990-T. Remember, however, not to rely upon your plan provider to give you all the information you need. While many plan providers do this correctly, the responsibility ultimately falls on you to make sure the K-1 documents and Form 990-T are submitted on time. It also falls on you to assure you have paid correctly.
Tax Implications for UBTI
If you file a 990-T, you probably will owe taxes on the income you report. Determining the amount you owe may become complicated, and the help of a tax professional might be advantageous. You will only owe on the portion of the investment income that was earned due to UBTI, as the remaining balance is subject to the tax rules governing the type of IRA you have.
- IRS: Form 990-T
- IRS: Form K-1
- Unrelated Business Income Tax | Internal Revenue Service
- Internal Revenue Service. "Unrelated Business Income Defined." Accessed Nov. 21, 2019.
- IRS. "IRS, Treasury issue guidance for applying UBTI 'silo' rules for tax-exempt organizations by identifying separate trades or businesses." Accessed Sept. 23, 2020.
- U.S. Government Publishing Office. "Title 26, Internal Revenue Code, Section 501." Accessed Nov. 21, 2019.
- Internal Revenue Service. "Internal Revenue Manuals, 7.27.4 Taxation of Unrelated Business Income." Accessed Nov. 21, 2019.
- Internal Revenue Service. "Publication 598, Tax on Unrelated Business Income of Exempt Organization," Pages 9–10. Accessed Nov. 22, 2019.
- Internal Revenue Service. "Form 990-W, Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations," Page 5. Accessed Nov. 22, 2019.
- Internal Revenue Service. "2018, Instructions for Form 990-T," Page 2. Accessed Nov. 22, 2019.
- Internal Revenue Service. "Estimated Tax: Unrelated Business Income." Accessed Nov. 22, 2019.
Based in Los Angeles, California, Bethany Eanes began her career in 2006. She specializes in legal, financial, and fitness writing, with publications on DUIAttorney.com and in local papers like "The Daily Breeze." Eanes earned a Bachelor of Science in history with focuses in humanities ad writing from Washington University.