Complex Tax Prep of MLP & PTP K1s
Tax Prep of Personal Income Tax Returns with MLPs (Master Limited Partnership) & PTP (Publicly Traded Partnership) Multiple K1s. Correct Equity Calculation of Partnership's Partners Basis & S Corp's Shareholders Stock Basis. HK CPAs on 83rd Ave Between Bell Rd & Thunderbird.
Tax Prep of personal returns with MLPs & PTPs Multiple K1s requires experienced CPAs. Peoria CPAs Renee Kolodziej and James Howe are experienced in complex tax prep with multiple K1s from MLPs & PTPs. Contact Us Today in Peoria at (480) 596-6499
MLPs & PTP Multiple K1s
MLPs are publicly traded partnerships (PTP), i.e., Limited partnerships which are traded on stock exchanges. A share in MLPs is called a “unit,” & owning MLPs or PTP units makes you a limited partner, i.e., a passive partner.
Sometimes MLPs or a PTP are technically not a partnership but a publicly traded limited liability company (LLC) which has chosen partnership taxation. There are some differences between the two, but for tax prep purposes they are the same.
Here's a very good explanation of the complex tax prep of PTPs & MLPs.
Here is the simplest and best explanation of Publicly Traded Partnerships Tax Treatment of Investors.
Taxpayers, as well as most investment advisers, generally do not comprehend the fact that publicly traded entities are taxed as flowthrough entities for income tax prep purposes. They are used to traditional investments, from which they receive dividend payments that are reflected on a Form 1099-DIV at year end, and having capital gains or losses upon the sale of their ownership.
Distributions from MLPs, if they were received from an ordinary investment, would be treated as dividend income.
Distributions from MLPs are treated as a return of Equity...which is a reduction in tax cost basis...and are not taxable income when received.
For tax purposes, a return of equity reduces your tax cost basis in the MLP investment....or for that matter, any other investment.
Simply put....you can only lose as much as you have invested, i.e., your equity or tax basis.
Here's what can happen.
Let's say you purchase units in an MLP for $1,000.
Over the life of your investment, you received $1,000 in distributions.
Those distributions reduced your equity, or tax basis, to zero.
Then you sell the MLP investment for $1,000.
You correctly have a gain of $1,000 since your tax basis is zero.
However, the Form 1099-B from your brokerage showing the sale proceeds of $1,000 also shows the tax cost basis of $1,000.
If you rely upon the brokerage's tax cost basis, then your gain will be zero and your tax return will be incorrect.
Will the IRS catch this mistake?
Probably not...at least for now.
That's because not only does the brokerage have no clue what your distributions are...but neither does the IRS since IRS K1 tracking leaves much to be desired....even though most brokerage 1099s (sent to the IRS) list MLP K1 distributions annually.
Brokerages...and apparently the IRS...just do not track the total of distributions from purchase date to sale date.
If they do track total distributions, then they obviously do not correlate the distributions to the tax cost basis calculation.
This tax treatment is the Key to understanding MLPs.
We have over 30 years experience in personal tax prep of returns with MLPs & PTP K1s.
We understand the complexities of MLPs & PTP K1s.
Complex Tax Prep of Master Limited Partnership & PTP K1s
Why go through all this tax prep pain & cost?
The answer is simple & obvious: Because of the tax benefits.
Here's a number of links listing the pros & cons of MLPs:Tax Guide to MLPs
8 MLP Risks
In addition to the tax benefits, MLPs also have tax risks. Here's a number of links focusing on the risks of MLPs.
Do You Know if You Are Invested in MLPs or A PTP?
It's not uncommon to not know whether or not you are invested in MLPs or PTPs for tax prep purposes. Perhaps one of the biggest issues in dealing with the tax prep of a taxpayer’s investment in MLPs or PTPs is determining whether or not the taxpayer has in fact invested in one.
Clearly, the basic way to identify this type of investment for tax prep purposes is upon the receipt of a Schedule K1 that has marked on its face that the entity is a publicly traded partnership. Many taxpayers do not know that they have invested in MLPs or a PTP until they receive the K1....or a letter from the IRS.
That makes your tax prep tough.
The only way to know for sure if you are invested in any partnership or MLP is if you received distributions. Your brokerage 1099 should list Partnership distributions....usually in the last few pages of the 1099.
If you did not receive K1 distributions, then you won't know you have a K1 until you physically receive it.
Accordingly, it may be necessary to review your 1099 at year end to see if there is a section listing distributions from Limited Partnerships.
Anytime we get a 1099 from a brokerage, we examine it to find a section listing distributions from Partnerships. More often than not, the taxpayer has no clue that they are invested in MLPs.
In many cases, a combined Form 1099 may indicate distributions from MLPs made to you, which provides an avenue to identify whether you should be receiving a Schedule K1 from MLPs to be included in your tax return.
However, the weakness of this method is that this form of identification will only assist in identifying those MLPs that have actually made distributions in a particular year. If your combined/expanded Form 1099 shows investment purchases for the current year, identification of MLPs or PTP K1s with no distributions may still be accomplished.
Once MLPs are identified, you need to be aware that receipt of the Schedule K1 from MLPs may not occur until late March, early April, or potentially even later, since the MLP's tax return is not due until September 15th.
What is the most appropriate way to handle this timing issue? Are you willing to extend your tax return prep in order to file once you have received the K1? Does your return get filed prior to receipt of the Schedule K1 using some sort of estimate, potentially with the filing of a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR)?
We do not recommend this approach since it puts you on the IRS radar.
How to Get Publicly Traded Partnership Tax Forms
Many MLPs & PTPs offer an investor relations website that allows an individual to enter relatively little information (Social Security number/employer identification number and the name on the account) to view his or her Schedule K1 from the entity. However, not all MLPs have this type of service, & you may need to contact the entity’s investor relations department directly in order to obtain the relevant information copy of the Schedule K1.
UPDATE: The Investor relations website has initiated restrictions to access K1 info. Basically, only the investor can now access the K1...but only if the investor has specific information about the activities and identity of the investment. More than one client has told us that they cannot access their own K1 info!
That's great for security purposes. We get it. But it is impossible for us to access the client's K1 info as we previously could, and is difficult for the K1 owner to access their own tax info. The enhanced "security" adds a minimum of one week to the client's tax preparation. Indeed, this security enhancement increases preparation time by at least a week...if not more...and increases the possibility of filing an extension.
Needless to say...we are not a big fan of the Investor Relations Website politically correct security enhancements.
What Happens When You Sell an MLP?
The number one problem an ordinary taxpayer has with the results of the tax prep upon the sale of MLPs is determining their tax basis.
It''s actually very simple, but the average taxpayer is generally shocked when they realize that distributions from MLPs have reduced their tax basis, i.e. their tax cost basis, in the Multiple Limited Partnership investment for tax prep capital gain purposes.
Generally, the Form 1099-B from the brokerage that sold their units only has the original investment amount as their cost basis but does not have the cumulative distributions of equity received. Therefore, the Form 1099-B cost basis is incorrect.
Distributions from MLPs or PTP K1s are a return of equity for tax prep purposes. A return of equity reduces your equity in the investment, i.e., your tax cost basis, in the investment. Therefore, for tax prep, your tax cost basis is lowered.
They did not pay tax on the distributions when they occurred, but now the "Chickens Have Come Home to Roost" upon tax prep of their personal return.
If you want your personal tax return with multiple states, rentals, and K1s from MLPs or PTPs prepared correctly Contact Us.