Generally speaking, only income generated from an active trade or business, such as a retail store, via a pass-through entity, like an LLC, margin, or real estate acquisition with certain types of debt obligations would be subject to the Unrelated Business Income Tax (UBIT). However, in the case of a self-directed solo 401(k) plan, there is an exemption under IRC 514(c)(9) for plan accounts that generate income from a real estate investment when a nonrecourse loan is used. Keep in mind, most types of investments held in a self-directed retirement account would not trigger UBIT. For example, any transaction that does not involve debt, but does generate capital gains, interest, dividends, rental income, or royalty income would not trigger UBIT or the requirement to file Form 990-T.
If you have determined that UBIT will apply to your self-directed solo 401(k) investment(s), the next step is to figure out how much tax will be owed. If a solo 401(k) plan produces gross income of more than $1,000 during the taxable year which is subject to UBIT, the retirement account must file IRS Form 990-T.
Filing Requirement for IRS Form 990-T
For self-directed solo 401(k) plan investors who will have unrelated business income tax in excess of $1000 after considering allowable deductions and expenses, such as depreciation, debt servicing, etc., the solo k would be required to file IRS Form 990-T, and Schedule A by April 15th, (or the 15th day of the fourth month after the end of its tax year). Account holders may request an extension to file Form 990-T by using Form 8868, Application for Automatic Extension of Time To File an Exempt Organization Return.
The return must be filed by the solo 401(k) plan and not by the account holder or plan trustee, and the plan’s tax identification number should be used.
One new change as of February 2021, is that the solo 401(k) now requires mandatory electronic filing of the Form 990-T. Limited exceptions apply. Any self-directed solo 401(k) must pay, in full, any tax due by the due date of the return, without extension.
Normally, a plan that needs to file Form 990-T needs to make installment payments of estimated tax if its projected tax (tax minus allowable credits) is expected to be $500 or more. Use Form 990-W, Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations, to determine the estimated tax liability. All taxed owed by the plan must be paid by the retirement account.
Net Operating Losses
If your self-directed solo 401(k) generates net operating losses (NOLs) in a current year from an unrelated business activity, those losses can be used to offset UBIT from a past year.
The CARES Act eliminated most NOL carrybacks. It was changed to provide that losses occurring in a tax year beginning after December 31, 2017, but before January 1, 2021 must be carried back to the five tax years preceding the tax year of the loss, which includes tax years prior to the enactment of section 512(a)(6). A self-directed solo 401(k) that is eligible to carry an NOL back to a prior year must file an amended Form 990-T for that year. Form 1045 or 1139 can’t be used for this purpose; however, Form 1045 or 1139 may be attached to the amended Form 990-T to show the NOL computation. On the other hand, a retirement account can waive the NOL carryback by attaching a statement to Form 990-T, as described in Revenue Procedure 2020-24.
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