Does UBIT Apply to Solo 401k Restaurant Investment?

QUESTIONS 

We opened a Solo 401k Trust and we now have a compelling investment opportunity in a restaurant. As I've read , the net income from a business investment, made from a 401k trust, would be subject to UBIT.

I have a couple of questions regarding this. I don't know exactly how the income or profit sharing would work, but let's say we get a check at the end of the fiscal year made out to the Solo 401k Trust. (I'm assuming any income from trust investments must go back into the trust.)

Let's say that check was for $10,000. So, that $10K is subject to UBIT, correct? And the difference that stays in the trust account, is then subject to income tax once distributions begin, correct?

It just seems like a lot of taxing going on.

Hope you can help and/or clarify.

ANSWERS

Good question. Yes unrelated business income tax applies to a solo 401(k) that makes an equity investment in a restaurant. However, unrelated business income tax does not apply if the solo 401(k) investment is processed as a promissory note to the restaurant. In other words,Unrelated business income tax only applies to equity investments not loans also known as promissory notes. To learn more about how to process a promissory note investment,CLICK HERE.

The reason that unrelated business income tax applies to an equity investment made via a retirement plan such as an IRA or a solo 401k plan is that government want to level the playing field between those individuals that invest personal funds vs those that invest retirement funds. Reason being, when an individual invests personal funds in a business as an equity investment, they have to pay capital gains taxes on those gains. Whereas a 401(k) that purchases an equity investment in a business like a restaurant the tax payments are delayed because all the income flows back to the plan and it grows on a tax deferred basis.

With respect to paying the UBIT tax to the government, it is paid directly from the solo 401k and it applies on any gains over a thousand dollars that result from the solo 401k equity investment. Therefor, using your example of $10,000 gains on an equity investment in a restaurant by your solo 401k, the $10,000 gains would flow to the solo 401k bank account and then the UBIT tax would apply on $9,000.

What is more, yes once you take distributions from the solo 401k you will need to pay federal taxes as well,and possibly state taxes if you live in a state that is imposes state taxes.

To learn more about the solo 401k regulations, VISIT HERE.