Trying to understand K1

The previous answer explains the K-1, but as far as getting money, think of the K-1 as nothing more than a means to change your purchase cost for eventual 1099-B reporting:

- When you sell, you report a capital gain / loss for tax purposes.

- The cost you use to calculate the capital gain changes with K-1's -- virtually every number on the K-1 eventually gets added or subtracted from your original purchase cost, changing your net profit/loss.  That's how you finally turn all those allocated entries into actual cash in your pocket.

Reporting taxes on the sale of a partnership is complicated too, but at least you only have to do it once.

Thanks for your answer. So I got into this entity because I bought stock in it first, which is now worth 0. So when you say "sell", I assume you are referring to when I sell or get rid of this 0.01 (penny) stock? Essentially I will have to ask the broker to remove this "worthless investment". At that point the K1 #s come into action when calculating profit (well loss really in this case).. But I still miss something.. In terms of cash transaction - I paid X upfront to buy stock, there is no transaction done after that - the K1#s really are not coming into my bank - then how come at the end when I sell, suddenly they become part of the action..

Normally I would have had X as loss and used that to write off other cap gains.. But now what happens, I can't do that? If eventually after taking into account the K1#s I end up with a loss of Y, I assume I can use it to offset other gains.. This is so fishy or at least flying over my head..

However you managed to become a unitholder, and regardless of the value of the MLP, from the IRS's perspective you're still a partner in an on-going legal entity.  So when I say "sell" I mean end your participation in whatever way has the partnership stop sending you K-1's.

As for the tax accounting, you still get to declare a capital gain (or in this case loss) from getting out of the partnership.  It's just that in this case, you'll have to go through a bunch of gymnastics to figure out what your loss is.

For example, let's say your K-1 showed you "getting" $100 on line 1 even though you got no cash.  And when you fill out your taxes, you find that you have a bill for $15 on that $100.  Despite the fact that that just feels wrong and unfair (you got nothing, and actually paid $15), here's how it works out:  let's say you originally paid $200 for this.  You "sell" it for $0.  When you go to calculate your loss, it won't be ($200).  It will be ($300).  The $100 you were forced to recognize even though you never got it is added to your purchase price.  You tell the IRS you paid $300, not $200, for this and get a bigger capital loss.

So in the end, the X you would have used to offset other capital gains becomes Y, just like you said.  But there's nothing fishy -- the difference between X and Y showed up on the K-1s AND you paid tax on that difference.  Now you're just getting it back in this final sale.

Thanks again. I am sure you are right and if re-read it a few times it will sink in. What gets me more is that this partnership was forced upon me 🙂 and the company is bankrupt. So really there is nothing coming my way via distributions or anything else.. And I probably will have to shell out $ to an accountant to just play with numbers like 10, 15, 100 in K1 to get it all done.. Thanks anyway

Don't think of it as a "forced partnership".  Consider it a "bonus cocktail party story".  Either way, don't feel bad about having difficulties sorting partnerships out.  A partnership is complicated enough.  Adding in tax aspects is just mean.  I've had MLPs for years, and still have a tough time keeping things straight.

Since the structure is now a MLP, you can sell your interest and move on.
Determining your gain or loss is explained above.

Interestingly, since the company is bankrupt and the stock is worth nothing.. Really there is nothing to "sell" to anyone.. I guess I just need to inform the broker that they remove it from my holdings.. The ticker is BBEPQ in case you wanted to look it up..

This entity is now a publicly traded entity so there is a market.  Agree it may not be the value you think it should be, but in order to close your transaction and claim any loss, you would need to sell it on the market.

Agree.  Over 5M shares traded just today.  Even though they're in bankruptcy, there's a tiny, tiny chance that they could emerge without wiping out existing partners.  That's why people are willing to gamble a penny/unit.  Its a lottery ticket.  You sell your units to one of them, and next year will record a complete disposition on your taxes, settling all the tax ramifications once and for all.

And make sure you start your basis schedule and keep it up to date until you sell the units.  This is critical.  Without this you will not be able to accurately determine your final gain or loss on this investment.

See page 2 of the IRS K-1 instructions for some guidance on maintaining your basis schedule:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf">https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf</a>

Thanks for note. I am not sure which ticker you are looking at, but BBEPQ is not at 5M volume. If you read the news, the bankruptcy court has already decided that common equity is worth 0. And at this time it costs more (trading fee) than the value of what I have! I will check with broker on what the right way to get rid of this is..

In reading some recent news it doesn't sound real good.  I would sell immediately.  Looks like the bankruptcy court may approve the latest proposal, but the commentary said that common unit holders (not sure what you are) will receive no recovery AND have some significant income recognition from cancellation of debt.
Good luck in getting out of this.

Yes very much a common unit holder I am 🙂 Its worthless really.. And I had gotten rid of such worthless securities before (unfortunately), but this time this also has this whole K1 complication.. Thanks for looking into it!

If I can ask you.. what does this mean "significant income recognition from cancellation of debt".. Can it then be worse than if the case where I just lost my initial investment? Does the K1 thing make it even worse given what is going with this company?

I am calling the broker to see how to sell out of this thing..

Guys, a followup.. So this was 2017 K1. I also have 2015 and 2016 K1 on the same thing. I didn't file them at all, somehow missed them.. So with the tracking cost basis thing, can 2017 return be filed solely based on 2017K1 or do I need to see the #s in 2015, 2016.. Is there any kind of carryover etc that happens?

There is carryover (any passive losses in prior years carryover and can be used to offset any future gains).  There are also taxable events that could be included in those past K-1's (e.g. line 5 interest, or line 6 dividends).  I'd use TT to amend you prior year returns, and then make sure to enter 2015's suspended losses into the amended 2016 return, and 2016's suspended losses into your 2017 return.

So I saw the prior returns, there is no interest or divs. What I see are some amounts < 300 in Box 1 and some for AMT and some other info in Box 20.. But I see Part II, K section as 12-13k$ - something about liabilities.. What are these! My entire investment was 3k which evaporated when it went bankrupt! I guess I will go through the amends and see what material difference it makes!

So I saw the prior returns, there is no interest or divs. What I see are some amounts < 300 in Box 1 and some for AMT and some other info in Box 20.. But I see Part II, K section as 12-13k$ - something about liabilities.. What are these! My entire investment was 3k which evaporated when it went bankrupt! I guess I will go through the amends and see what material difference it makes!

nexchap or Rick, will appreciate your time on this.. I have been racking my brains on this K1 and I read your answers to other questions where Section L with Tax basis checked apparently might just suffice for these basis calcs.. So in my case now.. I got rid of BBEPQ - sold for $5 this year.. So Final K1 will come next year..

In the meantime, this is what I see

2015
Beg Cap AC 0
Cap Contri 3754 <-bought here
Cur Yr Inc/Dec -117
With/Dist 125
Ending Cap AC 3512

2016
Beg Cap AC 3512
Cap Contri 0
Cur Yr Inc/Dec -1539
With/Dist 0
Ending Cap AC 1973

2017
Beg Cap AC 1973
Cap Contri 0
Cur Yr Inc/Dec 342
With/Dist 0
Ending Cap AC 2315

So these are all in Sec L... It looks like I could just use these in my case? So is my current basis 2315? and when I get my final K1 next year, is the loss then just $5 - $2315?

For 2017, Box 1 says 365$ so I guess I will have to pay taxes on that.. Next year, when I get out, I get to take the losses? What I feel strange about is that in a normal stock transaction case if I lost all 3754$, my losses would be $5 - $3754.. However with this basis now reduced, it seems like I lose out, its just $5 - $2315 now?

I have to amend 2016 for other reasons, so I can add in these (missed K1 in 2016), not sure if I need to go all the way back till 2015 - the amounts are small as well..

Thanks!

Responses to some of your questions:
1) At the end of 2016 your tax basis is $2,315
2) Since this is a PTP your loss in 2015 would have carried over.  No tax impact.
3) Same for 2016 - loss carried over.  Just so you understand, with PTP's you can only offset losses with income from this specific PTP.
4) I assume the second 2016 figures represent 2017?  If that is the case, trying to reconcile the $342 and the $365 you indicate that is in box 1.  Must be something else to reduce that to the $342?
5) You actually received a distribution in 2015 even though there was a loss being passed out.  So really, this distribution would cover any tax impact in 2017.

You don't have any real significant losses being passed out so my guess is that you shouldn't have any significant cancellation of debt being allocated to you.

Thanks Rick. Section L has "Tax Basis" checked. Yes the last box was for 2017..

yes the last section in my question referred to 2017. And in that K1, Box 1 has 365 but the current year increase in Box L says 342. I don't know why.. But also when I look at 2016, that Box 1 has 53 but the inc/dec figure is -1539.. There does not seem to be a correspondence between Box 1 and the inc/dec figures..

So now when I have sold it this year, when the final K1 comes around next year.. what would happen? As of end of 2017, the basis is 2315.. There will be a new basis for 2018 in that K1? I sold all of it for $5, so just wanted to know what to expect.

The thing is I didn't do anything about these K1s (small figures, didnt fully understand what they were for at the time).. in 2015, or 2016. So although you say that no tax impact in 15 or 16, just loss carrover, do I need to go and amend them to make this happen? Or can I do it starting in 2017 and then 2018 will be the final K1. I may have to amend 2016 for other reasons and if so I can include K1 - looks like essentially there will be a loss carryover for 1539$ - there are myriad #s in the K1 but is that the bottomline or so?

Responses:
1) I wouldn't amend a return that has no tax impact due to PTP losses.  Some may, not me.  I just think it leads to confusion on the part of the IRS.
2) In 2017 I would include the carryover losses in TT $1,656.  This way the losses are in the system and the 2017 income amount will be offset by the losses.
3) In 2018 your K-1 needs to be reviewed carefully.  The preparer will most likely zero out your Section L.
4) So for 2018 you need to determine your basis before any distribution impact.  In TT you will mark that the K-1 is final.  For the sales price you will show what any actual distributions are; if any.  
5) Finally for 2018 TT will take any allowable losses since this is the final year.

Thanks Rick, will keep your suggestion on amend in mind.. But even if there is no tax impact in the prior return, but there was a loss carryover, is that something I can indicate in the next return without amending the prior return?

1) Where did you get $1656 for carryover losses in 2017? For 2016, I see $1539, curious how you got to $1656?

2) Yes for 2018, I would likely need an accountant to do this right.. But was trying to assess everything till now..

3) Finally, I also have the CA return to deal with.. What would the impact of the K1 on CA? I see a statement along with the K1 that has some amounts against each state..  Thanks a lot.