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UBTI and Form 990-T: FAQs
Overview
What is UBTI?
Unrelated Business Taxable Income (UBTI) is income from a trade or business regularly generated by an exempt
organization that is not substantially related to the organization’s exempt purpose. The tax-exempt purpose of an IRA
is to provide income for retirement. Investment income earned by an IRA is tax deferred for a traditional IRA, and tax
exempt for a Roth if it’s a qualified distribution. However, if the IRA invests in a publicly traded partnership (PTP),
master limited partnership (MLP), limited partnership (LP), private equity partnerships (PEP), hedge fund partnerships,
or limited liability companies (LLC), it becomes a partner in an active business. If the partnership passes on profits
from its business, or investment income secured by debt, such income earned by the IRA may be treated as UBTI and
may be subject to tax.
What is UDFI? What is an example of UDFI?
Another way an MLP can generate UBTI is if it borrows money to purchase income-producing assets in support of its
primary business. This income, referred to as Unrelated Debt-Financed Income (UDFI), represents a subset of UBTI.
UDFI occurs when a partnership in which an IRA has an ownership interest borrows money (also known as using
leverage or debt financing). The net profits attributable to the leveraged portion are considered UDFI and are subject
to tax.
Example one: A real estate property is purchased with 75% IRA funds and 25% borrowed money. The borrowed
money is considered “unrelated” to the IRA because it is not taken from the IRA funds. A quarter of the total profit
earned is subject to UDFI tax.
Example two: An IRA invests in an MLP. That MLP then purchases $100,000 of common stock that pays $10,000 in
dividends. Of the $100,000 investment, $50,000 was borrowed by the MLP.
• Because portfolio income passed through an MLP is excluded from UBTI, the dividends distributed by the
MLP (the $10,000) are non-taxable to the IRA.
• However, since the MLP borrowed 50% of the common-stock investment, 50% of the dividends the MLP
distributes represent UDFI and will be taxed as UBTI.
When did UBTI requirements go into effect?
UBTI rules were created by Congress in 1950 and started applying to IRAs upon their creation in 1975. In tax year
1997, the IRS determined that firms like Schwab (custodians of IRA accounts) are required to prepare and file Form
990-T if the gross income of an IRA meets the $1,000 threshold. Custodians must then remit any tax due. In its
capacity as custodian, Schwab relied on clients to collect and send Schedule K-1 forms to Schwab.
What Is Form 990-T?
Form 990-T is used to report UBTI income generated in a tax-deferred account. An exempt organization that has
$1,000 or more of gross income from an unrelated business must file Form 990-T. Schwab examines your Schedule
K-1s to determine whether a Form 990-T is required, and files it for you if needed.
What is Schedule K-1?
Schedule K-1 (IRS Form 1065) is a tax document issued for a partnership’s investors, reporting each partner’s share
of the partnership’s earnings, losses, deductions, and credits. It also reports the UBTI earned in a tax-exempt account.
This document is used to prepare and produce Form 990-T.
Most partnerships use a vendor to create Schedule K-1, and the vendors share that data with Schwab. In some
instances, such as when partnerships do not use the vendors or the investments are classified as alternative
investments, the account holder must forward the Schedule K-1 to Schwab.
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Where can I find UBTI and associated information?
UBTI and related information is provided to Schwab by the partnerships. Schwab does not generate or calculate
taxable information on the Schedule K-1. If there is a discrepancy on your Schedule K-1, contact the partnership
directly.
You can also find information related to UBTI on several IRS forms and schedules:
• UBTI: Line 20, code V of Schedule K-1*
• Ordinary gains: Sales Schedule (attached to Schedule K-1)
• Capital gains due to debt-financed activities: Sales Schedule and Form 8949 (included in Form 990-T)
*Note: Although most Schedule K-1s list the total UBTI on line 20 code V, additional UBTI may also be listed on the
entity’s statements or tax schedules, or in the footnotes of these documents.
This is an IRA. Why do I have to pay taxes?
Certain regulations dictate the circumstances under which taxes may be owed and/or forms must be filed.
• Section 511 of the Internal Revenue Code (IRC) states that even though an entity is recognized as tax-
exempt, it still may be subject to a UBTI tax.
• Section 408(e)(1) makes these provisions applicable to IRAs.
• Treasury Regulation 1.6012-3(a)(5) stipulates that fiduciaries of all IRA types that have $1,000 or more of
unrelated trade or business gross income must file Form 990-T.
Which account types are in scope for Form 990-T filing?
According to IRS Publication 598, the following account types are subject to tax on UBTI:
• Individual retirement arrangements (IRAs), including traditional IRAs, Roth IRAs, Simplified Employee
Pensions (SEP-IRAs), and Savings Incentive Match Plans for Employees (SIMPLE IRAs).
• Keogh accounts (retirement plans for self-employed) and i401K accounts.
• Coverdell Educational Savings Accounts (ESAs) described in IRC Section 530.
What is the deadline to file Form 990-T? Are extensions possible?
The deadline for brokers to file Form 990-T is April 15, or October 15 with an extension.
• Schwab will request an IRS extension of time to file for all IRAs that have a high probability of requiring a
Form 990-T.
• An extension will not avoid penalties and interest that may be included in your calculations due to non-
payment of any tax due in full by the due date of the return. To avoid any additional penalties and interest
calculations, estimated payments would be required. The deadline to pay estimated taxes is April 15.
Are personal tax filing extensions attached to 990-T filing extensions?
No. The filing of Form 990-T is separate from the client’s personal tax filing. The extension filed is ONLY applicable to
the 990-T filing.
Can I get a copy of the extension filed on my behalf?
Schwab will not be sending copies of extensions filed to clients.
Who generates my Schedule K-1s? How can I view them?
For alternative investments (AIs), Schedule K-1 should be provided by the partnership directly to you. For publicly
traded partnerships (PTPs), you can generally find this information on the partnership’s website or from their form
vendor. Two commonly used form vendors are:
• Tax Package Support: https://www.taxpackagesupport.com
• Partner Data Link: https://www.partnerdatalink.com
To view your form(s), you’ll need to register and log in. You’ll need to provide your name, tax identification number,
and your current share quantity.
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Schwab is not responsible for the content of these websites.
Is there anything I need to do?
If you hold a publicly traded partnership whose Schedule K-1 is generated by Tax Package Support or Partner Data
Link, you don’t need to submit anything to Schwab. Schwab will determine whether a Form 990-T filing is needed.
If you hold an alternative investment or a partnership that doesn’t use Tax Package Support or Partner Data Link to
produce their Schedule K-1s, the alternative investment or partnership will send the Schedule K-1 to you and you’ll
need to send a copy, including any supplemental pages, to Schwab to be analyzed and included for potential Form
990-T filing.
If tax is due, please ensure you have funds available in the account that holds the assets that generated UBTI, so that
Schwab may make the payment on your behalf. If sufficient funds are not available in your account, Schwab will file
your Form 990-T without payment, and your account may be subject to penalties and interest from the IRS.
Where do I send the Schedule K-1 that I received?
If you have received a Schedule K-1 for an alternative investment held in your tax-deferred account, Schwab will need
a copy as soon as possible for analysis for a Form 990-T filing.
You may upload tax documents securely via Schwab.com Message Center or send them by mail:
Regular mail
Charles Schwab & Co., Inc.
Client Tax Reporting
P.O. Pox 982006
El Paso, TX 79998-2606
Overnight mail
Charles Schwab & Co., Inc.
Client Tax Reporting
1945 Northwestern Drive
El Paso, TX 79912-1108
Will I have to do this again next year? Can I avoid having to file Form 990-Ts?
If you’ve invested in an MLP or an LP, filing a Form 990-T may be necessary. The likelihood that a Form 990-T will be
required is increased when partnership shares are sold and when the partnership is affected by a corporate action or
bankruptcy event. IRAs that do not hold MLPs, LPs, or other flow-through entities generally do not have a Form 990-T
requirement.
Can I prepare the Form 990-T instead of having Schwab do it?
No. As custodian of your IRA, Schwab is required to file Form 990-T when tax is due and must remit payment from
your account that held the asset(s) that generated UBTI. Schwab’s name and address are used on the filing as well as
the payment.
Ex: Schwab Custodian Inc. FBO [Your Name]. Schwab remits payment on behalf of your IRA to the IRS through the
Electronic Federal Tax Payment System (EFTPS).
Tax Return Filing
Do I file Form 990-T or does Schwab?
Schwab will file Form 990-T on your behalf. In addition, we will send a copy to you for your records. If you see a
discrepancy, please contact us for further review.
Will Schwab file a Form 990-T to report UBTI losses?
Schwab will no longer file Form 990-T for losses; however, we will track losses to offset future gains.
Is Form 990-T filed under my Social Security number?
No. The IRA, not the IRA owner, owes the tax. Form 990-T will be filed under an Employer Identification Number (EIN)
belonging to the IRA. The IRA is a separate taxpayer from the IRA owner.
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