IRA LLC & Solo 401(k) Tax Filing Requirements

As tax time rolls around each year, we get lots of questions about tax filing requirements.

Good news!  Most all IRA LLC and 401(k) plans will have no filing activities.

A self directed IRA or 401(k) is simply a different business model for investing with your retirement savings.  At the end of the day, this is still a tax sheltered retirement plan with the same tax rules as a more conventional plan offered by a bank or brokerage.

There are some activities that can create tax exposure even in a tax-exempt entity like a retirement plan, and some states may have taxes that apply to the LLC entity used in our IRA plans, so read on to determine if you may have any filing requirements.

IRA LLC Filing Requirements

The IRA LLC has been established as a single-member LLC wholly owned by a tax-exempt IRA.

For federal tax purposes, the LLC is viewed as a disregarded entity.  As such, the tax and reporting liability for the LLC flow through to the sole owner – the IRA account.  The annual 5498 filing prepared by the IRA account custodian on behalf of your IRA is generally all that is required.  No federal tax return will be required for the LLC.

Generally, most states are tied in with the federal filing requirements.  However, you should contact a tax professional in your own state to determine the correct filing requirements for your particular state.

Some states such as Alabama, California and Kentucky have a franchise or privilege tax on all business entities, even though the underlying owner of the LLC is tax exempt.  Texas has a franchise tax, but only on income over $1,230,000 (as of 2022).  Texas LLC’s with income below that threshold still need to send in a form stating “not required to file”, however.

If the IRA has unrelated business income or debt financed income, the IRA will have additional filings associated with these activities.

Solo 401(k) Filing Requirements

There is no general plan filing in April for a Solo 401(k).  If you are wanting to make contributions to your plan, that is a matter you will address on your business or personal tax return.

Solo 401(k) plans with a plan value exceeding $250,000 at any point in the prior plan year will be required to file an informational return using form 5500-EZ by the end of July.

If the 401(k) has unrelated business income the plan will have additional filings associated with these activities.

Unrelated Business Taxable Income

An IRA or 401(k) plan that engages in a trade or business activity on a regular or repeated basis is subject to a tax on the income from such activities known as Unrelated Business Taxable Income (UBTI).

Passive activities such as interest on financial products or notes, dividends, royalties, and rents from real property are not subject to this tax.

Common activities that create UBTI are flipping properties or real estate development, any kind of dealer/resale activity, or equity in an operating business such as a restaurant, medical practice, etc.  Some crowdfunding programs or limited partnership entities will create such exposure depending on the underlying activity and whether the plan’s investment is in the form of equity (taxable) or debt (not taxed).

You will need to consult with your tax advisor and file form 990-T on behalf of your IRA or 401(k) if you have such income within your plan.  In addition to the federal filing, some states have a parallel filing requirement.

Unrelated Debt Financed Income

If an IRA uses debt financing such as a mortgage, there is a tax on the income derived from the borrowed money, which is referred to as Unrelated Debt-Financed Income (UDFI).  A Solo 401(k) is not subject to UDFI taxation for debt financing used to acquire real property, but would have exposure for other types of debt financing such as margin trading in the stock market.

You will need to consult with your tax advisor and file form 990-T on behalf of your IRA or 401(k) if you have such income within your plan.  In addition to the federal filing, some states have a parallel filing requirement.

Please keep in mind that Safeguard Advisors does not provide tax services.  We can help you to understand if you may have exposure to taxation through your plan activities, but cannot provide specific tax guidance or prepare filings on your behalf. 

Last updated 4/21/2022.