1) If I just hold an MLP for a few days/weeks (without receiving any distributions) and I sell out, what will be shown on my K-1? I understand that I will get a K-1 even if I hold an MLP for a second, but how would the income be allocated to me? Is it based on the taxable income times my prorated holding period times my % ownership? So if I held 0.1% of the MLP's units for a month and the taxable income was $12mm, then my K-1 taxable income would be $12mm x 0.1% x 1/12 = $1k?
yes. in general income is prorated on a per-share per day basis. however, you are in for a surprise. every MLP will also send you a disposition schedule and the surprise on that for many of the MLPs will be gain subject to recapture as ordinary which is not included on the k-1 itself. example sell $49 basis $48 (includes adjustment for k-1 income/loss) gain thus $1. however, gain subject to ordinary income recapture maybe $2. net result $2 ordinary income $1 capital loss = the net gain of $1. this is a trap for the unwary.
2) Is there a rule of thumb for materiality in determining when to file state tax returns for the MLP? For example, if my MLP gets taxable income in 30 different states, do I need to file income taxes in every single state? What is the penalty if I don't? I mean would I be on the hook just for the unpaid taxes + late fees or could the states sue me for additional penalties?
every state has different thresholds for non-resident filing. cerrtainly all the income /loss will be taxable in your home state if it has an income tax. if you don't file in a state that you are required to, expect a notice in a few years for the taxes, interest, and penalties. the worse part is that if your home state has an income tax you generally are entitled to a credit for income taxes paid to other states, but by the time you get such notice it may be too late to amend your home state o get a refund.
