UBIT - Important Things to know
UBIT is not a penalty. It is simply a tax on the machinations of the account.
UBIT is calculated by filling out a form 990-T. It can be advantageous to fill out this form even if the IRA is not going to incur any tax, because losses can be used to offset profits in other years.
When an IRA owns an ongoing business, tax on that business must occur. The tax can be taken at the company level before profits are paid to the IRA (in that case UBIT would not occur.). Or, the company can pay profits to the IRA before business taxes, at which point the IRA would be subject to UBIT.
In the case of debt leverage on real estate, UBIT is only calculated on the percentage of profits associated with the ownership percentage of the leverage. Expenses and depreciation can be used to minimize the profit calculation on the debt leveraged percentage of the property.
The debt leveraged percentage is calculated as an average over the previous 12 months.