What is Unrelated Business Taxable Income (UBTI)?

Tax-exempt organizations (such as pension plans, individual retirement accounts, foundations, and endowments) are subject to “unrelated business income tax” (UBIT) on their “unrelated business taxable income,” often referred to as UBTI. In connection with their investments in private investment funds, many tax-exempt investors seek to avoid or limit the funds’ generation of UBTI.

To avoid UBTI, the fund cannot incur indebtedness and cannot invest in flow-through operating entities, except through “blocker” structures.