USO ETF Partnership K-1

[Learner]

I purchased USO ETF and got K-1. Even I did not get any income, interests or dividends, on K-1 those boxes have some positive amounts. Now I had sold everything for this USO ETF and transaction appears on 1099. My understanding is I have to pay tax for those "income" (even I never get them). My questions are why K-1 boxes show those positive amount (it indicates my "income" or something else) ? Should I pay tax on those void income? How do I handle this on my tax return?

Thank you very much for your advice!

[nexchap · Accepted solution]

Your taxes will balance out.  Here's how:

- As a partner, you have to pay any taxes the partnership owes.  So if the partnership receives $10 in INT, you owe taxes on it even if they didn't send you the $10.  You pay this in Turbotax by entering the K-1 into the program, and it takes care of moving everything to the correct spots.

- However, when you sell your share of the partnership, your profit on the sale is different for a partnership.  With regular stock, your profit would be [sales price] - [purchase price].  But with a partnership, your profit is [sales price] - [purchase price] - [all the stuff the partnership made you pay taxes on].  So if you paid taxes on $10 in INT, you're 1099-B profit would be $10 less.

To do this, you'll have to adjust the cost of your purchase on the 1099.  Your K-1 from USO should have included a Sales Schedule showing instructions on how much to adjust it by.

[Learner]

Thanks a lot for your answer. I have USO Sales Schedule and I found (negative) numbers corresponding each purchase I had, under Cumulative Adjustments To Basis. And for Ordinary Gain and Alternative Minimum Tax Basis Adjustment are 0s. Do the those mean I have nothing can adjust? Or if I can, I believe I should, how to enter those into TurboTax as  [all the stuff the partnership made you pay taxes on]? In Sales Schedule it mentioned Form 8949, but did not tell how to do it. Can you help me out further? Really appreciated!

[nexchap]

- Your starting basis is your purchase price.  The partner has given you the "Cumulative Adjustments", which is [all the stuff the partnership made you pay taxes on].  The fact that's its negative means that they not only gave you some positive INT and DIV, but also some losses as well (probably box 1, ordinary income).  You'll see those losses in forms mode, when you look at the K-1 worksheet.  Unfortunately, you don't get to use those losses until you've sold the partnership completely, or receive some offsetting income from the partnership.  But you will get them eventually.
 
- You add those together, and get your new basis.  Your sales proceeds, minus your basis, gives you your total gain/loss.

- Normally, that gain/loss is split between 'capital gain/loss' and 'ordinary gain'.  Since your ordinary gain is 0 on the sales schedule,  no need to do that.

- Did you receive a 1099-B from the broker that handled the sale?  When you enter that 1099-B you'll notice that the broker probably filled in the cost as your purchase price.  You need to correct that cost to match what you calculated above, so that your reported cap gain/loss is correct.

- On the K-1 itself, when it asks you about the sale, you'd enter 0 for sales price and 0 for basis.

[Learner]

Thank you so very much for you instant response with very clear answers for my questions! Deeply appreciated!

First, my 1009-B had listed this transaction as other regular transactions, followed the formula you gave previously, [sales price] - [purchase price]. Nothing more.

Secondly, based on your advice, I guess my final gain/loss will be [sales price] - [purchase price] + [Cumulative Adjustments To Basis in Sales Schedule] (negative number). Basically it will be the Gain or Lost amount in my 1099-B, plus [Cumulative Adjustments To Basis in Sales Schedule] (negative number), for this transaction.

In order to correct the cost, I need manually adjust extra [Cumulative Adjustments To Basis in Sales Schedule] on Cost or Other Basis for this transaction on Turbo Tax. Am I right?

Again, thank you very much for your professional advice with prompt response! You do help me at all!

[nexchap]

Yes, you're right.  Just to make sure, here's what it should look like with made up numbers:
Sales price = $100
Purchase = $70
Original 1099-B shows Cap Gain of $30

Sales Schedule shows Cum Adjustments of ($10)
New basis is $60
Enter $60 under correct cost on the 1099-B
Cap Gain is now $40

[Learner]

Again, thanks a lot for your instant response.

Let me state that I had sold ALL my units in 2017 and got final K-1 and Sales Schedule now.

I am a little bit confusion regarding how to calculate final Gain or Loss.  

For example,

Sales price = $200
Purchase/Cost = $300
Original 1099-B shows Cap Gain or Loss of ($100)

Sales Schedule shows Cum Adjustments of ($70)
New basis is $230
Enter $230 under correct cost on the 1099-B
Cap Gain or Loss is now ($30)

In this way, it seems the more I lost from the transaction, the more tax I should pay, because loss is becoming less? Compare ($100) before apply Cum Adjustments and ($30) after apply Cum Adjustments for Cap Gain or Loss. Is that the case?

In my mind, I thought it should be this way?

Sales Schedule shows Cum Adjustments of ($70)
New cost will be $300 + $70 = $370
Enter $370 under correct cost on the 1099-B
Cap Gain or Loss is now ($170)

My understand for Cum Adjustments is a negative because it all about loss, no any gain. That way, it cannot make cost amount even less.

Please correct me if I was wrong. Thanks a lot for all your time and efforts towards helping me.

[nexchap]

Cap Loss is ($30) in your example, not ($170).  That's because you have other losses being put on Sched E by USO.

If you open up Forms mode, and go to the Form called "K-1 Partner" for USO, you'll see all your entries for the partnership.  At the very bottom of that form, there's a Section C: "Income and Loss Reported on Sched E".  Since this was a final disposition, Column h (Loss K-1) under the non-passive category, should have a number in it.  Let's say its $70.

That $70 is a loss that's going to make its way through Sched E and onto your 1040, line 17.  It will be on line 17 as ($70), reducing your taxable income.  That's the rest of your loss that you're trying to find above.  

In total, your gain loss is the cash that went in and out of your pocket:  $200 (from the sale) + $0 (we'll assume no distributions) - $100 (what you paid).  On your tax forms, that same number is going to show up as a combination of 1099-B, Form 4797 (if you had Ordinary Gain), Sched E (for any losses the partnership passed through), and any other spot the partnership may have reported income or deductions.  It can be complicated to reconcile, but it does work out.

[Learner]

Thank you so much for your response and confirmed the formula I should use.

Now I know where I should put those numbers in. When I enter K-1 Sale Information, The Partnership Basis is where I should put [purchase price] + [Cum Adjustments](negative in my case), and leave TurboTax do the rest logics and calculation. Hopefully this time I am doing the right thing according your advice. Please confirm that.

I want to give my big thanks to you for your professional advice, patience, detailed step to step instructions and instant response. I cannot finish this think right without your advice. THANK YOU!

[nexchap]

Now you enter a new arena:  how to do this in Turbotax.  See this answer on how to use the program:  <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3760966-how-i-report-the-sale-of-mlp-shares-in-turbo-tax-i-sold-al...>

[Sherbler1]

Hi All, 

I have a similar issue where I bought two ETFs (GSG and UCO) and held them for anywhere from 2-3 years and took a huge loss of $38k on them in 2018.  I do not recall ever receiving a K1 and had no idea I was ever considered any Partner as all I did on these was hit buy or sell via my Merrill Lynch account.  I bought in 2015/2016 and sold in 2018 which was a long term hold for all.  I just got a form CP2000 from my 2018 tax return that says I owe over $23k in short term capital gains taxes and a capital gain of $43k plus interest of $2k for 2018.  I never received any of this money and am now totally sick about how to handle it.  I have to respond to the IRS letter and then figure out how to amend my tax return for 2018.

Please advise of your thoughts and advice as to how to proceed.

Thank you,

Tim 

[ThomasM125]

If you reported the loss amount correctly, then you should have nothing to worry about. It may be that the IRS received a 1099-B form indicating a gain that does not reflect what actually happened. For instance, the cost basis might be missing on the 1099 form or it may be wrong.

I suggest you research the matter and create a schedule that shows what you paid for the investment, what income or losses you reported each year from the investment on your tax return, if any, and the resultant tax basis of the investment when you sold it. The sales proceeds less your adjusted basis will be your deductible loss, and if that agrees with what you reported on your tax return, the IRS will adjust their records accordingly.

You may not need to amend your tax return if your reported loss is correct. In this case, you would simply need to correspond with the IRS and demonstrate that your reported loss on the tax return is correct.

[MaxTax00]

On the K-1 for USO this year (bought and sold all within the same year), I show a loss of 3500 on 11C.  No other income on the K-1. That part is fine as it gets reflected in Part 1 of form 6781 as a loss of 1400 in short term and a loss of 2100 in long term to reflect the 60/40 blended rate. My question is, What is the best way to reflect the offset in TurboTax? I realize I have to lower my basis on USO by this 3500 to offset the K-1 loss. The problem I see is that if I try to adjust the basis in TurboTax at the individual transaction level then it wants to do the entire offset of 3500 as short term . Is this ok? Or should I just leave the 1099-B data as is and manually add a 2100 gain to long term and 1400 gain to short term on my Form 8949 to do the offset.  Thanks in advance for any help!

[nexchap]

@MaxTax00 You may want to post this as its own question to get more expert eyeballs on it.  I see it as two different questions:

a) What would the IRS expect to see:  the Cap Gain all reduced in short term, are split between long and short

b) How to make sure TT does that.

I don't know the answer to 'a', and don't want to guess or mislead.  But once you get it, the adjustment in TT is probably easiest in 'Forms' mode, in the Form 1099-B worksheet.  You can adjust the short term data you received from the broker by changing the cost to give you the correct Short Term gain/loss.  And if you need a long term adjustment, you can create a new 1099-B with a code F for that number.

You can probably find other ways to do this as well.  In the end, the important part is being able to document to the IRS (if ever questioned) that you declared and paid taxes on the right amounts of income.

The only other thing I'd offer is that the Sales Schedule that came with the K-1 might give you the answer to part 'a' of this, since it ought to show the adjustments to basis and how to split them.  But like I said above, I'm not familiar with USO or any of the guidance they give.

[MaxTax00]

@nexchap

Thanks so much for the quick response.  Very helpful.