What are the tax implications for a client owning an MLP in their IRA?

K-1’s generally come out in early to late March, please review the below UBTI rules preemptively.

·        You will receive a K-1 if you own a MLP/PTP whether you own it in a taxable or tax deferred account.

·        Trustees for IRAs (including traditional, Roth, Coverdell, SEP, and SIMPLE IRAs) that have $1,000 or more of UBTI in an IRA must file Form 990-T

  • o UBTI above the first $1,000 is taxed at the trust tax rates because IRAs are considered trusts for this purpose.

  • o The tax on UBTI is owed by the IRA itself as it is the partner in the partnership.

  • o MS and UBS will prepare and file the 990-T for the client and pay the taxes from the IRA

  • o UBTI from each partnership is found on the Form K-1 in box 20, code V

  • o If your total UBTI is below $1,000, then there is no filing or tax issue.

  • o Generally, income from REITs is exempt from UBTI. General support for this is found in Rev. Ruling 66-106

·        The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. IRAs are considered exempt organization for UBTI purposes.

·        Excluded from UBTI - All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments

o   Example - An IRA is a partner in a partnership that operates a factory. The partnership also holds stock in a corporation. The IRA must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation 

Unrelated Business Taxable Income (UBTI), please see IRS Publication 598