Turbotax - MLPs and K-1s

just wondering if my Turbotax will handle a MLP
and the K1 data issued ?
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Basically as you hold your shares you pay taxes only on the earnings of the
partnership, just as you would if you were a partner in any private
business. You do not pay taxes on the dividends or any other events, but
they do affect your cost basis. The distributions you receive will lower
your cost basis, and thus increase your capital gains when you sell later
on. But all of this is at the LTCG rate.
The following events will modify your cost basis as you own the units.
1. Distributions (dividends) will lower the basis.
2. Annual taxes paid on your portion of earnings will raise the basis.
3. Your share of the business's depreciation will lower the basis.
You do have to pay some of the final gains as ordinary income, but only the
gains that came from depreciation. The distributions and stock price
increases are paid at LTCG.
Here is an example for everyone that hopefully makes it simple.
1. Purchase shares at $100.
2. Receive distributions of $5 (reducing your basis to $95).
3. Pay taxes on earnings of $3 (increasing your basis to $98).
4. Your portion of depreciation is $1 (reducing your basis to $97).
5. You sell your shares for $105.
After selling the shares, you will owe LTCG on $7 and ordinary income on $1.
And you already paid ordinary income of $2 (after deducting depreciation)
while holding the shares.
So you bought the shares for $100, received a $5 profit from selling and
received $5 in distributions. Of your $10 profit, you paid LTGC on $7 and
ordinary tax rates on $3.
Most MLP's will try to strive for 80% of the investment being tax-deferred.
This makes them nice holdings in taxable brokerage accounts.
Reply to
ps56k
Hi, ps56k.
A wise tax man once told me, "In taxation, simplification is falsification." I've seen the accuracy of that advice, over and over.
SOME of what you show is true; some of it is not. The first word there is "basically", and that may be close enough for a layman, but "the devil is in the details" and there are a LOT of details in the Internal Revenue Code! Simple partnerships become extremely complex very easily.
First, what is an MLP? I guess you mean a Master Limited Partnership, but it could be a Multi-level Partnership - or something else.
Remember that I've been retired for a couple of decades and these rules change daily, so be sure to find competent professional help before you file your return. You cannot cite "some retired CPA in a newsgroup" as authority when the IRS comes calling.
A few points:
Distributions from a partnership are NOT dividends, but, yes, they do reduce the partner's basis.
No. Your share of net income does raise your basis in your partnership interest. The taxes you pay on that income do not affect your basis.
Deductions for depreciation lower the partnership's net income; therefore, it will lower each partner's share of that net income. Thus, as in 2., your basis will be raised less than if there were no depreciation. (Or lowered further if your share of net income turns out to be a net loss.)
in the example given:
My interpretation is that your share of net income was $2 ($3 less $1). Your K-1 should reflect that you contributed $100, had net income of $2 and received a $5 distribution, leaving your basis in your partnership interest at $97. (If your marginal tax rate for that year was 25%, this $2 income would cost you $0.50 tax, which does not affect your basis; it will not appear on your K-1 at all.) IN THIS CASE, we got the right answer, but not all cases are this straightforward.
When? If you have held your partnership interest for more than one year, then your gain probably will be all long-term capital gain. But the word "probably" there can hide some pitfalls. Some of your gain may be short-term capital gain, and some of it may be "ordinary income". SOME of the partnership's assets may require special treatment on the partnership's return (Form 1165), and SOME of this special treatment may flow through Schedule K-1 to your personal Form 1040. Much of this depends on what kind of business the partnership is in: oil and gas, or real estate, or farming, or any of several other categories. This area was already complex when I retired and I'll bet it has become even more convoluted since then. That's why I strongly urge consultation with a CPA or other qualified tax professional.
Now for some good news: Assuming the partnership follows competent advice, your K-1 should be correct - and TurboTax should have no trouble sorting out all this mess if it is entered correctly on your computer. ;
Reply to
R. C. White
RC - tnx.... it is for a stock I've been reading about, but have never had to deal with a K-1.
Their "tax package" webpage has some links on the right side - and one provides an individual file for TurboTax. So - just doing some very basic homework.
Reply to
ps56k
Hi, ps56k.
OK. I followed that link:
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Now I am more confused - and I think you are confused, too. ;>(
As I said, I'm sure tax laws have gotten even more complicated since I retired. Corporations and partnerships are fundamentally different creatures. In the good old days these differences were recognized and respected by both general laws and tax rules. But then taxpayers began to ask, a la Henry Higgins, "Why can't a corporation be more like a partnership? And vice versa?" So then Congress responded by creating Subchapter S; a Sub S corporation doesn't pay income tax; it allocates its income to its shareholders and THEY pay the tax - much like a partnership. Then new entities - like a PLLC (Public Limited Liability Company?) - became popular so that some partnerships are taxed more like a corporation. And that's about the time I retired, around 1990. The situation has become even more muddled since then, obviously.
This line in your latest message indicates some lingering confusion:
In my long-but-out-of-date experience, "stock" and "K-1" don't mix - except in a Sub S corporation, which was for a small number of stockholders who usually knew each other.
The website you pointed to is for "Brookfield Infrastructure Partners L.P." The L.P. abbreviation means Limited Partnership. The LP form of organization is not new, but Wall Street and sophisticated managers and investors have given it many new features in recent decades. The "limited" in the name means that it is formed under a state law that allows a partner to risk only his investment in that partnership, unlike a general partner, whose entire fortune is at risk if the partnership cannot pay its debts. In other words, a general partner can lose his home, his cars, his other investments - everything - but a limited partner risks only what he has committed to that one venture. So an LP is much like a corporation - but investors are still partners, not stockholders, and each is taxed on his share of the partnership income. Ford Motor pays taxes on its own income, and then may pay dividends from what is left. Its shareholders pay tax on the dividend - if they get one - but they do not pay tax on a share of Ford's undistributed income.
Like I keep saying, discuss this with a trusted tax adviser whose knowledge is current. Let him/her help you understand the thick fine-print documents that the partnership (or corporation) managers will be sending you.
RC -- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken Deluxe 2011 R 8 and Windows Live Mail in Win7 x64)
RC - tnx.... it is for a stock I've been reading about, but have never had to deal with a K-1.
Their "tax package" webpage has some links on the right side - and one provides an individual file for TurboTax. So - just doing some very basic homework.
Reply to
R. C. White
I consider it a "stock" type investment - since it is listed on the NYSE, and can be traded.
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and I do realize the LP implies the issuing of the K1 vs 1099, which is why I was browsing around since I have never received or used a K1 with TurboTax.
Reply to
ps56k
Hi, ps56k.
I consider it a "stock" type investment - since it is listed on the NYSE, and can be traded.
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and I do realize the LP implies the issuing of the K1 vs 1099, which is why I was browsing around since I have never received or used a K1 with TurboTax.
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Well, from an investor's perspective, that probably makes some sense.
But I thought your original question was about taxation, not about its investment qualities. And taxation depends on its classification in the Internal Revenue Code, not on what a partner might "consider" it.
The use of Schedule K-1 is evidence of the whole range of differences between a partnership and a corporation. The differences are very significant legally (I am not a lawyer!) and in treatment by the Internal Revenue Code. Corporate taxation is under Subchapter C of the code; partnerships are under Subchapter K. It's not like subparagraphs b and c of a single section of the code; the differences are quite significant to both the entity and its shareholders or partners.
But, as I said earlier, so long as the K-1 is properly prepared by the partnership and properly entered into your computer, TurboTax should have no problem with integrating it into your Form 1040.
RC
Reply to
R. C. White
My K-1 came with a poster-sized illustration of the K-1 and all the associated forms with circles and arrows showing where each piece of information on the K-1 went on each form.
As you say, TurboTax handled the K-1 without any issues.
Reply to
Bert Hyman
Does TurboTax also track the basis of the investment through the years? That'll have to be reported when the investment is sold.
Reply to
zvkmpw
Hi, zvkmpw.
Does TurboTax also track the basis of the investment through the years? That'll have to be reported when the investment is sold.
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No.
Your ending capital balance shown on your K-1 is USUALLY equal to your basis in your partnership interest. But there are MANY reasons why it might be quite different.
For example, if you bought your partnership from another partner, rather than by adding your investment into the partnership itself, your basis would be what you paid to the other partner, NOT his capital balance that you purchased. If you acquired your interest by contributing an asset worth $100,000 in which your basis was only $80,000, your basis would require special calculation. If you inherited your interest or received it as a gift, your basis could be quite different from your capital balance. If the tax code required you to treat some expenses in a certain way - such as for depreciation or charitable contributions or any of many other special provisions - then your basis could vary from your capital account. That's why we usually get SO MUCH fine-print information along with our K-1 each year. If it were as simple as it looks on the surface, we wouldn't need all that. :>(
Things like that are why I keep urging ps56k - and you and everybody else - to consult a CPA or other qualified tax practitioner about the reporting rules for any K-1 you receive from a partnership - or from an estate or trust or any other entity that issues a K-1 to you! The simplest ones are quite simple, but the simplest one can become VERY complex very fast, in ways that are not obvious to most people.
RC
Reply to
R. C. White
As RC stated, Turbotax does not track the basis. The MLP does track the basis and it will be provided to you when you sell the investment.
Based on my personal experience with selling an MLP, here is what happens:
When you sell, you will receive a Sales Worksheet which will list the following items some of which are provided by the MLP including "Adjustment to Tax Basis"
(1)Units Disposed, (2)Buy Date, (3)Sell date, (4)Sales Proceeds, (5)Purchase Amount, (6) Adjustment to Tax Basis (7) Total Gain/Loss (8) Ordinary Gain/Loss (9) Capital Gain/Loss (10) Alternative Minimum Tax Adjustment
The MLP provides the data for (1),(2),(3),(6),(8) and (10). You have to enter data into the rest of the columns based on your records.
Based on their instructions, the total in column (8)- Ordinary Gain/Loss is posted to Form 4797 Part II, line 9. The total from Column (9)- Capital Gain/Loss to Form 1040 Sched D and the total from Column (10) to Form 6251. The longer you hold the MLP before selling, the higher will be the value of the Ordinary Gain/Loss which is eventually used in the calculation of ordinary income and not in the calculation of capital gain.
These entries can all be handled in Turbotax manually. However, you have to be careful if you are downloading and importing your stock transactions from your broker into Turbotax. That import will include the sale of the MLP. You just have to be careful not to include the MLP transaction twice in Turbotax, once from the download/import and once from your Sales Worksheet entry.
Reply to
Arnie Goetchius

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