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jkspa
New Member

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

does it go, as a positive number on line 12 of schedule D?

1 Best answer

Accepted Solutions
GeoffreyG
New Member

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

Actually, as a Publicly-Traded Partnership (PTP) owner, you will take your capital account balance as shown on your Schedule K-1, and add it to your nonrecourse liabilities figure (also shown on the Schedule K-1 mailed to you).  If and only if the sum of those two balances are negative, do you then need to "recognize" a long-term capital gain on your Form 1040 Schedule D . . . so as to "restore" your outside "basis" in the MLP back to zero, in compliance with the tax laws.

But, if you do need to take that step, then what you will want to do is the following.

Make a new entry in the Stock Sales / Investments section of TurboTax, and report this as a sale of a long term asset, even though nothing has really been sold.  You call it a stock sale or equity sale, so that you'll be accorded the proper capital gains tax treatment; and then enter a sales price sufficient to "restore" your outside basis in the Master Limited Partnership back to zero -- factoring in your nonrecourse partnership liabilities designated by the PTP.  That is, you'll need to add a figure to your long term capital gains, sufficient to make all three numbers (capital account, nonrecourse liabilities, and long term capital gain added) total out to zero.

The cost basis amount in such a Schedule D entry can be entered as $0.01, just to avoid any software error, and is a negligible amount that won't affect the outcome.  The "category" for Form 8949 purposes should be "F," signifying long-term, "noncovered" items.  You can name the MLP, on the Form 8949 data entry, to help identify (and remember) what this item is.  Call the entry something like "XYZ PTP, Basis Restoration" or similar.

For future years, if you continue to own the MLP, then you'll further need to track such outside basis adjustments manually, as your MLP's tax office usually won't do it for you, and won't adjust your capital account (as printed on the Schedule K-1) for you, to reflect any such actions that you've taken in reporting long-term capital gains on your tax return.  Additionally, your nonrecourse liabilities (as shown to you annually by your MLP on your Schedule K-1) will continue change each year as well.  Thus, you will need to take into account those future changes in nonrecourse liabilities, as well as track your outside basis, so as to properly continue to make such future adjustments (i.e., declaring long-term capital gains) to keep your basis at "zero" or above.

Of course, seeking professional tax preparation assistance, when dealing with the trickier issues of MLP taxation, is always an advisable course of action (or option) as well.

Thank you for asking this important question.

View solution in original post

16 Replies
GeoffreyG
New Member

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

Actually, as a Publicly-Traded Partnership (PTP) owner, you will take your capital account balance as shown on your Schedule K-1, and add it to your nonrecourse liabilities figure (also shown on the Schedule K-1 mailed to you).  If and only if the sum of those two balances are negative, do you then need to "recognize" a long-term capital gain on your Form 1040 Schedule D . . . so as to "restore" your outside "basis" in the MLP back to zero, in compliance with the tax laws.

But, if you do need to take that step, then what you will want to do is the following.

Make a new entry in the Stock Sales / Investments section of TurboTax, and report this as a sale of a long term asset, even though nothing has really been sold.  You call it a stock sale or equity sale, so that you'll be accorded the proper capital gains tax treatment; and then enter a sales price sufficient to "restore" your outside basis in the Master Limited Partnership back to zero -- factoring in your nonrecourse partnership liabilities designated by the PTP.  That is, you'll need to add a figure to your long term capital gains, sufficient to make all three numbers (capital account, nonrecourse liabilities, and long term capital gain added) total out to zero.

The cost basis amount in such a Schedule D entry can be entered as $0.01, just to avoid any software error, and is a negligible amount that won't affect the outcome.  The "category" for Form 8949 purposes should be "F," signifying long-term, "noncovered" items.  You can name the MLP, on the Form 8949 data entry, to help identify (and remember) what this item is.  Call the entry something like "XYZ PTP, Basis Restoration" or similar.

For future years, if you continue to own the MLP, then you'll further need to track such outside basis adjustments manually, as your MLP's tax office usually won't do it for you, and won't adjust your capital account (as printed on the Schedule K-1) for you, to reflect any such actions that you've taken in reporting long-term capital gains on your tax return.  Additionally, your nonrecourse liabilities (as shown to you annually by your MLP on your Schedule K-1) will continue change each year as well.  Thus, you will need to take into account those future changes in nonrecourse liabilities, as well as track your outside basis, so as to properly continue to make such future adjustments (i.e., declaring long-term capital gains) to keep your basis at "zero" or above.

Of course, seeking professional tax preparation assistance, when dealing with the trickier issues of MLP taxation, is always an advisable course of action (or option) as well.

Thank you for asking this important question.

View solution in original post

jkspa
New Member

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

This advice is right and guided me to the correct way of calculating basis, which is in the IRS pub Partner's Instructions for Schedule K-1 (Form 1065).  It is important to track the CHANGES in non-recourse liabilities, as well as the non-recourse liability itself, as the author GeoffreyG. states. This is seen by using the worksheet in the pub. The info for entering the LT gain (if you have one) is correct.
weinbecb
New Member

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

Tell me if I am wrong,  but if you want to continue holding your MLP after your adjusted basis falls to zero, you should report distributions as long term capital gain on line 12 of Sched D and supplemental losses (mainly box 1) as losses on the same line 12.   If these balance each other you can continue to avoid taxation of your distributions as ordinary gain, with no tax outlay.

Claude4
Level 2

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

You say that "It is important to track the CHANGES in non-recourse liabilities, as well as the non-recourse liability itself, as the author GeoffreyG. states."  Well, GeofferyG said "you will need to take into account those future changes in nonrecourse liabilities."  

Claude4
Level 2

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

With respect to weinbecb's comment that "you should report distributions as long term capital gain on line 12 of Sched D and supplemental losses (mainly box 1) as losses on the same line 12", the IRS is pretty clear that losses cannot be deducted once the basis in a partnership goes to zero.  See the Caution in the Worksheet for Adjusting the Basis of a Partner's Interest in the Partnership in the IRS Schedule K-1 Partnership Instructions, https://www.irs.gov/instructions/i1065sk1.  So only the first half of weinbecb's comment makes sense, i.e.  once the basis of a partnership goes to 0, you should report distributions as long term capital gain on line 12 of Sched D.   If the partnership is subsequently sold, make sure the distributions taken as capital gains are not included in the cumulative adjustment to basis that the partnership reports (if you are using that).  That would be reporting the same capital gains twice.  If they are, subtract out gains previously taken. 

Anonymous
Not applicable

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

form 8949 worksheet category C description distribution in excess of basis.  date acquired - date interest in partnership acquired date sold 12/31/2019

 

now I'll raise a question.  are there any liabilities shown on the k-1.    some types add to your basis so you could end up with a positive basis making the negative capital a/c not taxable  (the negative capital when added to the proper liabilities results in a positive number)   

 

there are two key code sections involved. section 465 with deals with at-risk. at-risk is for purposes of determining whether losses are deductible or not.   section 752 which deals with basis.  distributions are not taxable if you have basis after the distribution.  see this link for a further explanation.

   https://www.dbbllc.com/newsletters/focus/jun2012/partnership-tax-rules-%E2%80%93-basis-partnership-l...

 

i

Claude4
Level 2

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

With respect to HACKITOF's comment "form 8949 worksheet category C description distribution in excess of basis," I cannot find form 8949 worksheet anywhere in TurboTax Desktop, nor could I find a Category C Description anywhere on form 8949 or in the instructions to Form 8949.   So unless further guidance is provided, distributions in excess of basis is best reported as a LT capital gain.  In Turbotax, the best entry seems to ba a stock sale for which no 1099-B exists, and select the type of investment sold as "Everything Else."  In the "learn more" section, you will see this is considered to be, by TurboTax, a Liquidating Distribution because "your cost basis in the stock is zero."

Claude4
Level 2

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

I respectfully and strongly disagree with that the idea that you include changes in nonrecourse debt in your basis calculation ONLY for the purpose of determining how to handle a distribution when your basis goes to zero.  First, generally speaking, nonrecourse debt of a partnership is debt a partner is not liable for.  They are not "on the hook" for repaying it.  The partner bears no risk of economic loss.  So how can increases or decreases in a partnership's nonrecourse debt affect a partner's basis?  Secondly, if somehow you argue that a partner's share of a partnership's nonrecourse loans should be included in the partner's basis, then that treatment should be consistent.  The partner's share of nonrecourse loans for which they somehow bear an economic risk of loss should be included in their basis when the partner buys into the partnership, when they sell that interest, or whenever that economic risk of loss arises or disappears.  This should not be a "shadow basis calculation" that occurs only when the partner's basis goes to zero.   Also, as HACKITOFF noted, Section 752 deals with the calculation of basis.  Example 1 of 26 CFR section 1.752-1 at https://www.law.cornell.edu/cfr/text/26/1.752-1 states "Only the net increase or decrease in B's share of the liabilities of the partnership and B's individual liabilities is taken into account in applying section 752."   If the partner never assumes any additional personal liability for partnership loans, he cannot include these loans (particularly nonrecourse loans) in his basis calculation.  A quote from https://www.dbbllc.com/newsletters/focus/jun2012/partnership-tax-rules-%E2%80%93-basis-partnership-l... says " Nonrecourse liabilities can provide basis for distributions."  Perhaps they are referring to "bad boy guarantees" as described in https://mazarsusa.com/ledger/bad-boy-guarantees-recourse-or-nonrecourse-debt/, but for a limited partner in a publicly traded partnership, this doesn't apply.  

Frank145
Returning Member

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

So its 2021 and I have read this thread several times,.....

What is the current best approach to enter a MLP that has gone negative  for capital as of 2020.

Think in terms on a very old guy ...who needs simple instructions.....like step one.....step two...etc.

Thank you very much for your help.

 

Grandpa Frank 

 

SamS1
Expert Alumni

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

In a nutshell, if you receive distributions from a MLP where the negative capital balance plus non-recourse debt is still negative, you need enter an amount on the Sch D.  To determine the Sale price amount, it would be the lesser of:

  • the distribution amount received or
  • the negative total from adding the negative capital balance plus non-recourse debt. 

The cost basis would be 0.00.  If you held the MLP for greater than a year, the gain would be long term.  On the Sch D, your date of sale would be the date you received the distribution and your purchase date would be the original date you purchased the investment.  Since this transaction is not reported on a 1099B, I would leave column F blank.

Claude4
Level 2

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

It seems to me that (1) you need to track the total of your capital balance plus non-recourse debt and (2) reductions in that balance as you receive distributions.   For example, if your capital balance plus non-recourse debt (which I will call "the balance") is $9K at the beginning of the year, and you receive four quarterly payments of $6K, the first payment would reduce "the balance" to $3K ($9K - $6K).  The second distribution would be split, with $3K going to reduce "the balance" to zero, with the remining $3K receiving capital gains treatment.  The remaining two distributions would both be treated as capital gains, as the capital balance plus non-recourse debt would  zero when those distributions occurred.   

ReneeM7122
Level 8

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

You are correct, you need to track the total of your capital balance plus non-recourse debt and reductions in that balance as you receive distributions. 

 

See IRS instructions for K-1

mlpabc1980
Level 2

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

Hi,

here is a slight variant for my situation.  I did not and have never sold any shares of my PTP MLP.  This year the K1 reported a negative number for the capital account in item L but in item K the partners share of liability is positive.  The sum of K and L is positive.  I item J , all percentages are positive.

 

my question is should I not check the box in Turbo Tax asking if 8 am at risk.  I did not check the box, and form 6198 for at risk limations was completed by TT.  Is this right?  I lose passive loses?

 

 

ReneeM7122
Level 8

I have k-1 from PTP MLP. Ending capital account is negative which means i must report LT cap gains. how?

Correct.  You should check the box  asking if you are at risk.  If you don't, then form 6198 will be generated.  Here is specific information from the IRS instructions:

 

At-Risk Limitations

Generally, if you have (a) a loss or other deduction from any activity carried on as a trade or business or for the production of income by the partnership, and (b) amounts in the activity for which you are not at risk, you will have to complete Form 6198, At-Risk Limitations, to figure your allowable loss for the activity.

The at-risk rules generally limit the amount of loss and other deductions that you can claim to the amount you could actually lose in the activity. These losses and deductions include a loss on the disposition of assets and the section 179 expense deduction. However, if you acquired your partnership interest before 1987, the at-risk rules do not apply to losses from an activity of holding real property placed in service before 1987 by the partnership. The activity of holding mineral property doesn't qualify for this exception. The partnership should identify on a statement attached to Schedule K-1 any losses that are not subject to the at-risk limitations.

Generally, you are not at risk for amounts such as the following.

  • Nonrecourse loans used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity that are not secured by your own property (other than the property used in the activity). See the instructions for item K, later, for the exception for qualified nonrecourse financing secured by real property.

  • Cash, property, or borrowed amounts used in the activity (or contributed to the activity, or used to acquire your interest in the activity) that are protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability).

  • Amounts borrowed for use in the activity from a person who has an interest in the activity, other than as a creditor, or who is related, under section 465(b)(3), to a person (other than you) having such an interest.

 

You should get a separate statement of income, expenses, and other items for each activity from the partnership.

Note.

 

Box 21 in Part III of Schedule K-1 (Form 1065) will be checked when a statement is attached.

 

@Claude4

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