990T reporting/IRA ownership in bank s-corp
Scenario:
Bank elected s-corp status in 2009. Taxpayer’s IRA held stock on 10/22/2004. 2009 and 2010 K1s have reported losses. It appears there is a 990-T filing requirement to report and pay unrelated business income tax on the IRA’s share of s-corp earnings.
Questions:
1. Per 990-T instructions, is it correct to assume that filing would be required even if K1s reported losses, as the gross earnings surely exceed $1000?
2. Is it the responsibility of the taxpayer or IRA custodian to file the 990-T? Would the filing responsibility be stated in the custodial agreement? What if the custodian has not filed? If it is the taxpayer’s responsibility, what if the s-corp cannot provide the proper UBIT computation?
3. What are possible penalties if 990-Ts have not been filed for 2009 and 2010?
4. Is there any way to get the bank stock out of the IRA in a manner that would not be considered a prohibited transaction?
5. Who’s EIN and address should appear on the 990-T?
Permalink Submitted by mk foss on Tue, 2011-06-14 02:00
Losses on a schedule K-1 from an S corporation will not cause a Form 990-T requirement. You should save the K-1s ard report the losses when you first must file Form 990-T.
The custodian is responsible for filing Form 990-T but generally the information about the UBI goes directly to the IRA owner. The owner is responsible for getting the information to the custodian (the Schedule K-1 from the S corporation). For example, if the S corporation had losses of $1,200 for 2009 and $1,500 for 2010 and a profit of $2,000 for 2011 – the owner would give the K-1s to the custodian before the April 15, 2012 filing date for the 990-T. The tax form would show the 2011 income and report the 2009 and 2010 losses; a net operating loss would be created ($2,700 less $2,000) that would carryfoward to the 2012 and subsequent Form 990-Ts.
Any tax owed by the IRA would be paid from the IRA – if paid by the IRA owner it would be a prohibited transaction or an excess contribution or both.
There is no penalty for not filing for 2009 and 2010 if there is less than $1,000 of Schedule K-1 income in those years but IRS imposes underpayment penalties if the UBIT is not prepaid. There is no exception that allows you to rely on the prior year’s lack of a tax laibility or no filing requirement for the prior year.
A distribuiton of the shares is the only way I know of to get the S corporation stock out of the IRA without a prohibited transaction. The distribution would be taxable and could also incur a 10% penalty if the owner is under age 59.5.
When you file a Form 990-T you never use the IRA owner’s SSN – the custodian should be filing it and handle the EIN.
Permalink Submitted by Bill Humphrey on Thu, 2011-06-16 22:24
Hello, Two follow up questions/highlights to the answers provided.
I have always filed those returns to establish the carryforward/carryback losses and start the 20yrs, even thought the 990-T reflects a loss. What is the basis for holding on to the unreported losses to claim in a future period vs filing? It would certainly be easier, but I can’t find any rule allowing it.
Second, an IRA is generally not an eligible shareholder of an S Corp, although they can be certain bank S-corp stock. Just wanted to highlight that for readers. That limitation is not the case for 401-k’s and other Qualified Plans though.
Thanks for the interesting and informative site.
Bill
Permalink Submitted by mk foss on Fri, 2011-06-17 00:49
It is fine to file a 990-T to establish the loss carryforward but if there is no filing requirement, the IRS has accepted the prior year losses on the first 990-T that met the filing requirement.
The only time when an IRA can be an S corporation shareholder is when the S corporation is a bank meeting certain requirements. The greater exposure to a 990-T filing requirement is from other investments. Any investment that’s operating in a partnership form, or an LLC that is treated as a partnership may be required to file a Form 990-T when there is Unrelated Business Income. Debt financed property owned by the IRA can subject you to unrelated business income tax. That would be mortgaged real estate or margin accounts in IRAs. I had a referral where the individual used his IRA to invest in his employer’s business. It was an operating business generating UBI – he recognized a large gain when the business was sold and had ordinary income from sales of inventory and other “hot assets”.