If an enterprise is a pass-through entity, also known as a partnership or limited liability company, that produces or sells goods or provides services,
the IRA's share of the enterprise's ongoing net income likely will be Unrelated Business Taxable Income, or UBTI. An IRA is required to pay income tax
on UBTI at the trust income tax rate. Also, if the business is a pass-through entity that acquires any assets through loans or on margin, a portion of
the IRA's share of the income may constitute UBTI.
The IRA, generally, will not have UBTI on the sale of its equity interest in the pass-through entity, except when that interest was acquired through
outstanding debt within 12 months of the sale.
Structuring an enterprise as a C corporation can avoid UBTI, although the enterprise then will be subject to income tax in accordance with applicable
corporate taxation rules.
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