What Are UBIT and UDFI Taxes?

what are UBIT and UDFI taxes

If you own a self-directed IRA or you’re looking to open one, you may come across some new phrases, such as UBIT and UDFI. At Accuplan, we want you as informed as possible so you can make wise investment decisions with your self-directed IRA, which is why we’ve covered the information you need to know about these taxes below.

What Are UBIT Taxes?

Unrelated business income tax (UBIT) is a tax on the income earned on unrelated business, no matter the tax filing status. UBIT is associated with an IRA running an active business.

Who Pays UBIT?

If you use an IRA to form an LLC to purchase and operate a gas station or dry cleaner, businesses that are obviously not related to the IRA’s primary purpose, you may need to pay UBIT on your net income. This is because the IRA is considered a trust, so you will be taxed at the trust tax rate. This change to the tax code was intended to create more equal opportunity between for-profit organizations and tax-exempt organizations that conduct the same businesses.

What Is the Rate?

The current UBIT tax rate is as follows:

  • 10% for taxable income between $0 and $2,550.
  • $255 for income between $2,551 and $9,150, plus 24% of the excess amount over $2,550 
  • $1,839 for income between $9,151 and $12,500, plus 35% of the excess amount over $9,150.
  • $3,011 for income over $12,501, plus 37% of the excess over $12,500.


UBIT and unrelated business taxable income (UBTI) are often used interchangeably, but they refer to slightly different concepts.

UBIT is the tax that tax-exempt organizations may be required to pay on any unrelated business income they generate. Unrelated business income is income from a business or trade that is regularly carried on by the organization and is not substantially related to its tax-exempt purpose. UBIT is calculated on the net income from unrelated business activities after deducting certain expenses.

UBTI, on the other hand, refers specifically to the amount of unrelated business income that is subject to UBIT. It is calculated as the gross income from unrelated business activities minus any allowable deductions. Essentially, UBTI is the portion of unrelated business income that is taxable and subject to UBIT.

UBIT is the tax itself that tax-exempt organizations must pay on unrelated business income, while UBTI is the amount of unrelated business income that is subject to UBIT. Both UBIT and UBTI are calculated on the net income from unrelated business activities, but UBTI is used specifically to determine the taxable portion of that income.

What Are UDFI Taxes? 

udfi falls under ubti

Unrelated debt-financed income (UDFI) is related to an IRA receiving a loan for the purchase of property or other business activity. Additionally, with some exceptions, when a tax-exempt or tax-deferred entity, the tax is applied to the debt-financed portion of the gain. UDFI falls under UBTI. Taxes on both UDFI and UBTI are reported and calculated on IRS Form 990-T.

Who Pays UDFI?

Property that is held to produce income is known as debt-financed property. If tax-exempt organizations or IRAs that hold property for income production dispose of it at a gain in the tax year and acquisition indebtedness was outstanding during the 12-month period prior to the disposition date, this property is debt-financed.

Typically, average acquisition indebtedness is the average amount of the outstanding principal debt in the part of the tax year in which the entity or IRA holds the property.


UDFI and UBTI are two different types of income that are subject to tax for tax-exempt organizations. UDFI refers to income generated by a tax-exempt organization from an investment that is financed through debt. For example, if a tax-exempt organization takes out a loan to purchase a rental property and generates rental income from that property, the portion of the income that is attributable to the debt financing will be subject to UDFI tax.

UBTI, on the other hand, refers to income generated by a tax-exempt organization through a trade or business that is unrelated to its tax-exempt purpose. For example, if a tax-exempt organization operates a gift shop to generate revenue and that revenue exceeds a certain threshold, the excess revenue may be subject to UBTI tax.

file a form 990-t

Tax-exempt organizations are required to file a Form 990-T to report and pay taxes on this income. However, the rules and calculations for each type of income are different, and it’s important to understand the differences between UDFI and UBTI to ensure compliance with tax laws.

How to Calculate UBIT and UDFI Taxes

The calculation of UBIT and UDFI taxes depends on various factors and can be complex. The following is a brief overview of how these taxes are calculated:

UBIT Tax Calculation

To calculate UBIT, follow the steps below:

  1. First, determine the organization’s gross income from all unrelated business activities.
  2. Then, subtract any allowable deductions, such as business expenses, from the gross income to arrive at the taxable income. 

UDFI Tax Calculation

To calculate UDFI, follow the steps below:

  1. First, determine the organization’s gross income from the debt-financed investment.
  2. Then, calculate the percentage of debt used to finance the investment. To do this, divide the debt by the adjusted basis.
  3. Next, multiply the percentage of debt used to finance the investment by the gross income from the investment to arrive at the UDFI.

UBIT and UDFI taxes are complex, and there are many factors that could affect the calculation, such as the nature of the organization’s activities and the type of debt financing used. Therefore, it’s always best to consult a tax professional or accountant for assistance in calculating these taxes.

Contact Us at Accuplan

At Accuplan, we offer self-directed IRA administration. If you would like any information regarding self-directed IRAs, reach out to us today. Talk with your tax accountant if you need more specific information regarding tax questions.

*Our information should not be relied upon for investment advice but for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax, or investment advice. We make no guarantees.

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