Tax

Do you own a traditional IRA, Roth IRA, SEP-IRA, or SIMPLE IRA? Usually, the income earned within these accounts is tax-free. This applies to common investments such as stocks, bonds, mutual funds, ETFs, CDs, and Treasury Bills.

But if your IRA makes alternative investments, it may be subject to a special tax called the unrelated business income tax (UBIT)—and that’s true even if it’s a Roth IRA.

When Does UBIT Apply?

Investing in active businesses. If your IRA invests in an S corporation, a limited partnership, a regular partnership, or an LLC engaged in an active business, it may owe UBIT. This does not apply to investments in C corporations because such corporations pay their own taxes.

A common example of a UBIT-generating investment is an investment in a master limited partnership.

Using debt financing in a self-directed IRA. If your self-directed IRA buys real estate or other assets using debt, it may owe the UBIT on its unrelated debt-financed income.

For example, if your IRA buys a $500,000 rental property with $250,000 of debt, 50 percent of the rental income is subject to UBIT.

How UBIT Works

Tax rates. UBIT is taxed at trust tax rates, reaching the top 37 percent bracket at just $14,450 of taxable income.

Exemption. Each IRA gets a $1,000 exemption from UBIT annually.

Filing requirements. If an IRA generates more than $1,000 in unrelated business taxable income, it must file Form 990-T electronically and the IRA (not you personally) must pay the tax. The IRA custodian handles this filing separately. It’s not part of your personal tax return.

Double taxation for traditional IRAs. A traditional IRA paying UBIT faces double taxation—first at punitive trust rates and then at ordinary income rates when you, the traditional IRA owner, withdraw funds.

Key Point

IRAs should generally avoid investments that generate UBIT.

If you want to discuss UBIT, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 18, 2025

If your business has not yet claimed the 2021 Employee Retention Credit (ERC), you still have time—but you must act soon.

What Is the ERC, and How Much Can You Claim?

The ERC is a refundable tax credit designed to support businesses that retained employees during the COVID-19 pandemic. For the 2021 tax year, eligible businesses can claim up to $7,000 per employee per quarter for the first three quarters—a total of up to $21,000 per employee.

For example, if your business qualifies and has 10 eligible employees, you could receive up to $210,000 in refundable tax credits.

Who Qualifies?

Your business may qualify if it meets one of the following conditions for Q1, Q2, or Q3 of 2021:

• Significant decline in gross receipts – Your business experienced at least a 20 percent decline in gross receipts compared to the same quarter in 2019.
• Full or partial suspension of operations – Your business faced a federal, state, or local government-ordered suspension of operations due to COVID-19 restrictions.
• New businesses (recovery start-up businesses) – If you started your business after February 15, 2020, you may qualify for a credit of up to $100,000.

Why You Must Act Now

The ERC is claimed by filing an amended payroll tax return (Form 941-X) for the relevant quarters. The deadline to file your 2021 ERC claims is April 15, 2025—and this date is fast approaching.

Many businesses have overlooked or misunderstood the ERC, assuming they do not qualify or it’s too late to apply. Even if you received a Paycheck Protection Program (PPP) loan, you may still be eligible for the ERC if you don’t use the same wages for both programs.

Time Is Running Out

If you are eligible for the 2021 ERC, you could have substantial money on the table. The IRS deadline to file amended payroll returns is April 15, 2025, and we strongly recommend beginning the process as soon as possible.

If you want to discuss the ERC, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 11, 2025

If you have inherited (or may someday inherit) an individual retirement account (IRA), the 2025 changes may significantly impact your tax planning.

Key Updates

• RMD requirements. Starting in 2025, annual required minimum distributions (RMDs) are mandatory for most inherited IRAs. Failure to comply may result in penalties of up to 25 percent, reducible to 10 percent if corrected promptly.
• 10-year rule enforcement. Non-spousal beneficiaries must fully deplete inherited IRAs within 10 years of the original owner’s death, with annual RMDs generally required.

Spouses and Special Cases

• Surviving spouses can assume ownership of the IRA or withdraw from it as a beneficiary. Roth IRAs offer additional flexibility, allowing for tax-free growth without RMDs.
• Minor children have until age 31 to deplete the account, with the 10-year rule beginning at age 21.
• Disabled beneficiaries may be exempt from the 10-year rule indefinitely.

Planning Strategies

Strategic withdrawals can help you avoid higher tax brackets. For example, spreading withdrawals evenly over 10 years can minimize tax impact. Timing withdrawals based on expected tax rate changes can also optimize savings.

If you want to discuss inherited IRAs, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 7, 2025