Unrelated Business Income In Qualified Plan Investments

Like other tax-exempt organizations, qualified plans might be liable for the federal income tax on Unrelated Business Taxable Income (UBTI).

What is UBTI?

A tax-exempt organization’s main aim should not include a commercial activity’s earnings. For instance, a charity that operates a store would have its profits from that store taxed even though it is generally not taxable.

How Does This Work in Employee-Benefit Plans?

Retirement plans are examples of employee benefit programs whose primary purpose is receiving funds from participants and investing them. Such activities generate passive income such as dividends and interest which usually do not qualify as UBTI.

But if the plan receives income from debt-financed properties (i.e., bought using borrowed money), this could attract UBTI taxation. Some exceptions apply with certain real estate investments though.

Key Points For Business Owners

1. Familiarize Yourself With UBTI: Just because your plan is primarily tax-exempt doesn’t mean all incomes earned through unrelated business activities cannot be taxed.
2. Invest On Passive Investments: Generally speaking, dividends, interests, annuities or rents derived from real property are not subjected to taxation under the category of UBTI.
3. Be Wary Of Debt-Financed Properties: Unless otherwise exempted by law, such properties’ earnings can attract taxes under the U.S Internal Revenue Code as stated above.

Understanding UBTI allows business owners to better manage their qualified plans and keep their tax-exempt status.