An LLC is an ideal way for Self-Directed IRA investors to manage their assets more directly, as it gives greater direct control of IRA assets while offering access to an LLC business checking account for easier funding of transactions.
If the LLC generates unrelated business taxable income or unrelated domestic filers income (UBTI/UDFI), IRS Form 990-T must be filed annually to report this. We will cover this requirement in depth along with any other tax requirements specific to IRA LLCs.
What is an LLC?
An LLC is a legal entity used for managing investments and assets, such as real estate investments. Self-Directed IRAs may use them to invest in alternative assets like real estate through “Checkbook Control.” An SDIRA with this feature can reduce transaction fees by enabling its manager (typically the IRA owner) to write checks directly or transfer money via wire directly to properties or investments without going through custodian first.
Use of an LLC does not affect the tax treatment of income and losses for an SDIRA; however, the LLC itself could be subject to unrelated business taxable income (UBTI) or unrelated debt financing income (UDFI). For instance, if it generates profit from operations not related substantially to its exempt purpose such as running restaurants that are unrelated, or acquires debt to finance investments which trigger UDFI regulations then a Form 990-T must be filed immediately in such instances.
What is the tax treatment of an LLC?
Self-Directed IRA LLCs can be powerful retirement investment tools that give the IRA owner total control of his or her investments without custodial interference from an IRA trustee or custodian. But to maintain its tax advantages, these accounts must be properly set up. Specifically, any funds must not commingle between accounts nor engage in Prohibitive Transactions that violate regulatory guidelines.
An LLC is generally considered a pass-through entity for federal (and most state) income tax purposes, meaning its gains and losses pass directly through to its owner – typically an IRA account holder – though there may be certain events like UBTI and UDFI which require specific IRS forms to be filed in certain circumstances.
If your SDIRA invests in real estate, rental properties or other passive income investments, no additional taxes may need to be filed; however, qualified custodians must submit form 1099-R and that each LLC in which your SDIRA invested provides you with a Schedule K-1.
What is the tax treatment of an IRA LLC?
As a rule, the IRS considers an LLC with one owner as a sole proprietorship for tax purposes, meaning no taxes are withheld from it and income passes directly through to its owner who must report it on their personal income tax return. However, should Self-Directed IRA LLC incur Unrelated Business Taxable Income or Unrelated Debt Financed Income (UBTI or UDFI), Form 990-T must be filed immediately using only funds held within its IRA account for payment of any applicable taxes due.
Real estate investments through an IRA/LLC have proven increasingly popular as owners can exert direct control of the LLC and use its business checking account to more easily fund transactions, contracts and expenses related to real estate assets. Furthermore, this structure protects IRA assets from liabilities created by their LLC as its owner isn’t personally liable for its obligations – although please keep in mind that an IRA/LLC still falls under federal and state prohibited transaction rules.
How do I file a tax return for an LLC?
Self-directed IRA LLCs can be effective investment vehicles when properly established; however, to remain tax sheltered they must meet all state requirements and do not engage in prohibited transactions; for instance mixing personal funds with those belonging to the IRA LLC and incurring expenses on its behalf would constitute such violations. Working with an experienced advisor is the key to successfully creating and running such an entity.
An IRA LLC allows SDIRA holders to invest in alternative assets, including real estate, tax liens, precious metals and private company shares. Furthermore, this structure gives checkbook control while decreasing transaction fees.
To start investing with an IRA LLC, first send the SDIRA custodian your operating agreement of your newly formed LLC with yourself as the sole owner and submit an investment request through Entrust’s platform – we’ll issue a check directly into your LLC checking account so you can begin purchasing investments while we ensure they conform with IRS rules and you don’t incur prohibited transactions.