K-1 and cost of basis of USO

[bl121]

Hi,

  I am working on 2022 tax return and need some help on K-1.

  Part 1: Background info:

  On  2020,   We purchased some shares of USO.

  For 2021 tax year, we received K-1 for USO and it reported we had gain $NNN although we never sold any shares of USO in 2021. We included $NNN in 2021 tax return.

  For 2022 tax year, we received K-1 for USO and it reported we had gain $MMM.

 We sold  USO in 2022. That is why we also received 1099-B for USO sale.

Part 2: Issue I run into

  For my 2022 tax return, I will include $MMM from K-1.

  But here is the issue. The cost base in 1099-B USO sale is original one. The capital gain reported on 1099-B doesn’t count $NNN from 2021 K-1 and $MMM from 2022 K-1. Correct capital gain should be the amount from 1099-B - $NNN - $MMM.

  Part 3: Questions  

       How to report correct gain for USO on Turbo Tax?  I was told to add $NNN and $MMM to the cost basis of USO. If we do that, that will make cost basis of USO is not same as reported on 1099-B.

  Or there are any ways to adjust cost basis of USO without modifying cost base from 1099-B (for example enter $NNN and $MMM on a form 1234, etc.)?

  If we have to modify cost basis on 1099-B, should I write a note to IRS to explain cost basis discrepancy? If explanation is needed, that mean I have to file by paper to include USO cost explanation since I don’t think we can send note to IRS via e-file.

Thanks!

BL

[GeorgeM777 · Accepted solution]

Your questions are italicized below and will be addressed in the order in which you presented them.

How to report correct gain for USO on Turbo Tax?  I was told to add $NNN and $MMM to the cost basis of USO. If we do that, that will make cost basis of USO is not same as reported on 1099-B.

You are correct in that your basis needs to be adjusted.  The Prospectus for the United States Oil Fund provides that if a shareholder sells its shares, it will recognize gain or loss equal to the difference between the amount realized and its adjusted tax basis for the shares sold. 

Regarding how to determine your adjusted cost basis, the Prospectus provides that your basis 

1. increased by (a) its allocable share of USO’s taxable income and gain and (b) any additional contributions by the shareholder to USO and,
2. decreased (but not below zero) by (a) its allocable share of USO’s tax deductions and losses and (b) any distributions by USO to the shareholder. 

Thus, if $NNN and $MMM are synonymous with number 1 above, then increase your original cost in USO by that amount.  If not, then apply number 1 and 2 to $NNN and $MMM and make the necessary adjustments to your basis. 

Or there are any ways to adjust cost basis of USO without modifying cost base from 1099-B (for example enter $NNN and $MMM on a form 1234, etc.)?

Yes, there are way to adjust cost basis in TurboTax.  However, when you enter your USO information, enter your original basis and then you will indicate that the original basis is not correct and needs to be adjusted.  If you are using TurboTax online, follow these steps:

1. From Wages & Income, left margin, scroll down the screen to Investment and Savings.
2. Select Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B).  
3. If you have already entered some investments, then select Add investments.   
4. You can import your tax info on the screen that gives you that option or you can choose Enter a different way.  If you select Enter a different way, then select the investment type--which in your case would be Stocks, Bonds, Mutual Funds.  
5. Continue through the application, and when you get to the screen Now, enter one sale on your [Name of Brokerage] 1099-B, scroll down and check the box indicating that The cost basis is incorrect or missing on my 1099-B.  
6. Continue through the application.  At the screen We noticed there's an issue with your cost basis...Let us know if you'd like to make changes, check the appropriate box and enter your information. 

If you are using TurboTax CD/download, the process is somewhat different.  Select the Personal tab, then the Personal Income tab, then scroll down the screen to Investment Income and select Stocks, Mutual Funds, etc.   As you enter your information, you will see the screen, Select any less common adjustments that apply.  Check the box, The cost basis on my statement is incorrect and in the pop-up box enter the correct cost basis.

If we have to modify cost basis on 1099-B, should I write a note to IRS to explain cost basis discrepancy? If explanation is needed, that mean I have to file by paper to include USO cost explanation since I don’t think we can send note to IRS via e-file.

No, just follow the steps above.  However, keep your documents regarding USO in the event you need to explain how you arrived at your adjusted cost basis.  

[Mike9241]

USO is a publicly traded partnership PTP (Part 1 box D checked). you are correct the broker reports what you paid originally it has no clue as to what your tax basis is. With the k-1 package, you should have received a supplemental schedule that reports your adjusted tax basis.  sales price - adjusted tax basis = gain

gain less any ordinary income recapture is capital gain (in effect ordinary income recapture, if any, is added to tax basis to determine capital gain. it would also be reported on line 20AB if there is any  

here are full reporting instructions for a sale of a PTP

MLP and PTP reporting k-1 and 8949

Please follow these instructions. Incorrect entries can result in entering the sale twice or otherwise incorrectly. Also see the sales schedule that was included with the k-1

Enter the k-1 info
Check the PTP box
If total disposition proceed as follows:
Check final K-1 (s/b marked on actual k-1)
Check sold or otherwise disposed of entire interest

On the k-1 disposition section for sales price use the ordinary income (sometimes you’ll see a column with the “751” or the words “Gain subject to recapture as ordinary income”. This info comes from the supplemental sales schedule that should have been provided. Its also now on the k-1 box 20AB - no 20AB then this sales price is zero
Cost is zero
Ordinary income is the sales price.
This info flows to form 4797 line 10 and is taxed as ordinary income. This step is necessary so any suspended passive losses are now allowed

Now for the 8949.
The broker’s form is probably coded as B or E – sales proceeds but not cost basis reported to the IRS. This is because the broker does not track the tax basis. It used what you paid originally which is not correct.

The correct tax basis is:
What you paid originally, should be the same as what is on 1099-B as cost,
Then there is a column on the sales schedule that says cumulative adjustment to basis. If it’s positive add it to the original cost. If it’s negative subtract the amount.
Finally add the amount of ordinary income reported above, if any.
The result is your corrected cost basis for form 8949.

Some other things. Look at lines 20AB. That number should be added to the ordinary income above for reporting the 199A (qualified business income from the PTP). You don’t have to enter this but then you lose out on a tax deduction = 20% of this amount.