What Is Unrelated Business Taxable Income (UBTI)?

Unrelated business taxable income (UBTI) is income earned by a tax-exempt organization — such as a nonprofit or a retirement account — from a business activity that isn't substantially related to the organization's tax-exempt purpose. For individual investors, UBTI most commonly arises when an IRA or 401(k) invests in a partnership or LLC that actively conducts a trade or business, such as certain master limited partnerships (MLPs) or leveraged real estate deals. If a retirement account earns more than $1,000 in UBTI during a year, it may owe taxes even though the account is otherwise tax-exempt. This can be a surprising complication for investors who assumed all activity inside a retirement account was completely sheltered from tax. Understanding UBTI is important before adding alternative investments like operating MLPs, leveraged real estate funds, or certain hedge fund structures to an IRA or 401(k).