Cost Basis of PTP's on K-1/1065

How about box 19 (Distributions), codes A and B?

Sorry, I haven't used this worksheet before. It's quite long, whereas adding line 19 over all the years seems easier. Maybe the worksheet is more thorough.

For my PTP, I added up all of the line 19 distributions from the beginning and they add up to more then the original cost for the first time this year (2008) and I will have to address this issue for 2008.

Assuming that all of these distributions are "Return of Capital" (which is probably not 100% true), how does one report this as income? Is this considered a capital gain and reported on Sched D or is it other income and reported on 1040, line 21 or does it go somewhere else?

The issue remains that we (the OP and I ) don't know how to calculate how much of the distribution is "Return of Capital" and how much is something else. Apparently the data in Box L, does not give you the true value of "Return of Capital"

Your capital is what you put in after reduction by other distributions, plus what you earned and retained, such as interest and dividends paid to you, less losses you recognized that came to you on a K-1.

It is unusual for your capital account to actually go negative.

I originally purchased the PTP from my broker anmd the price I paid is what I put in. I get a statement from the broker showing the distribution which is the same amount shown on line 19. So I know what I paid and what the distributions but I don't know how to calculate how much of the of the distribution is return of capital.

If the distribution is 100% return of capital, how can you say that it would be unusual that capital account would go negative?

Until you reduce the distribution to zzero, it is all return of capital.

If it were something other than a distribution, the k-1 would say so.

Do you have any more capital invested to be returned to you?

Pleae re-read your last question. You can reduce your invested capital to zero, but no more.

You are correct. It can't go below zero. I set Quicken up to record all distributions as "Return of Capital" and because the total of the distributions is more then what I paid for the stock, Quicken shows it as negative. However, it should be treated as zero.

That said, it appears that I will owe tax on the distributions for 2008. The question remains: How do I report these taxable distributions on my 1040?

Distributions in excess of basis are reported in the year paid on your 1040 schedule D.

I don't understand. Some LLC's, for example Alliance Bernstein (AB), pay dividends. If those dividends are automatically reinvested, as dividends from a mutual fund may be automatically reinvested, then that adds to the capital basis. If this is the case, then the sum of line 19 may be be larger than the initial investment, but still less than the actual investment (which is initial investment plus re- investments), and in this case there would be no excess to report on Schedule D.

My last comment was directed at the statement that this was a corporation.

We don't really deal with Distributions in a corporation.

I assume AB is treated as a PTP and not as a corporation?

If so, then your basis is your original basis plus dividends paid to you plus reinvested amounts. Even capital gains distributions you are paid add to your basis. And that is true even if you do not do any reinvesting. In most cases if the PTP tracks your basis, I would use their figures.

Yes, AB is a partnership.

Are you saying that that if AB pays dividends and those dividends are not re-invested, they still add to my cost basis in AB? That doesn't make sense to me.

That was sloppy of me. I agree with you.

Also if AB recognized accrued interest paid, and passed that to you on a K-1, it lowers your basis.

I have not have that happen. If I did, I guess I would consider using zero if the number went negative. But that is a non-expert guess.

I agree that is an important point; many distributions are not return of capital and are taxed in their various ways on each return

This is an interesting topic that few are brave enough to discuss. I am nothing like an expert and don't have a recommendation. If I saw the capital account number go negative, I would contact the partnership by phone or email and ask what a negative number means.

Nice discussion of the PTP K-1 problem. Thanks for the suggestions.

Yes, on one or more of my PTP K-1's, the Box L "capital account" is in negative territory. But this is a caculation made by the PTP for its purposes, not a running tax basis number I can use in my own 1040.

Still, when I subtract all the distributions over the years from my original cost (the simple, easy, and apparently incorrect procedure), the result is now pretty close to zero and should hit zero by 2009. The rule is that when your tax basis hits zero, new distributions must be reported as income, either cap gains or dividends, not sure which (and that's not too hard to find out, I think).

The problem remains: how do I use the figures in the annual K-1 to calculate what portion of distributions is NOT return of capital and therefore doesn't reduce my cost basis? It's got to be in there somewhere.

If I had a "tax advisor" I would leave it up to him/her, but I do my own 1040 using TurboTax, which works OK until the cost basis becomes zero. TurboTax has me enter the K-1 figures box by box and then does the calculations. But TurboTax doesn't seem to keep an annual tally of PTP cost basis.

Art

There seems to have been a great deal of misinformation in this thread so far. The calculation of tax basis in a PTP is straightforward. Start with your initial purchase price. Each year add all of the income items from the K-1, subtract all of the expense items, add any additional cash you contributed to the PTP (reinvestments, additional purchases, etc.) and subtract all of the cash distributions. The result is your new adjusted tax basis. Continue each year until you sell. Should your adjusted tax basis reach $0, any additional cash distribution is taxable income.

Ira Smilovitz

Isn't that what box L "Ending capital account" on the K-1 is supposed to be when the "Tax basis" box is selected?

Above algorithm seems confusing. Say box 1 (odrinary business income) and box 5 (interest) are positive. You report these on Schedule E and Schedule B part I and pay taxes on it. But from "year add all of the income items from the K1" it seems that you're also saying that box 1 and box 5 add to your cost basis If this is so, then it means that when you finally sell your shares you receive a furher tax break -- say you bought shares at $100 and sold at $120 two years later, so long term gain is $20, but say box 1 and box 5 over those two years add up to $3, then by the formula above your long term gain is $17.

And about "and subtract all of the cash distributions". What about distributions of property (line 19b)?

Strange that the IRS says you cannot trust the box L analysis done by the partnership, which probably hires pros. But then it's OK to trust your own records and analysis, and I for one am quite confused :).

Correct. If you didn't add this income to your tax basis, you would be paying tax twice -- once on the $3 of income when it was earned and then the $20 capital gain when you sold. However, you invested $100, received $120, and paid tax on $23 of income/gain. But also see below...

Yes, you would also subtract any distributions of property. However, I'm not aware of any PTP that distributes anything other than cash. If the cash/property distribution were exactly equal to the $3 of income reported on the K-1, your tax basis would now be $100 + $3 income - $3 distributions = $100. You sell for $120 and report $20 of capital gain. You would have received a total of $123 in cash and paid tax on $3 income + $20 gain.

There are certain items that are reported on Schedule K-1 which the individual taxpayer can elect to treat in more than one way. The choice of treatment affects the tax basis but the PTP has no way of knowing which election the taxpayer made. These issues do not affect all PTPs, so you may not encounter the problem. See the section titled "Elections" a little higher on the same page.