How do I make an Adjustment for a Publicly Traded MLP sale for a Non-Conforming State (California)?

[drennman]

I have entered the Publicly Traded MLP sale data into my Federal Return (using the form sent by the MLP).  Since my state is non-conforming, I need to make an adjustment to Ordinary Income as the State Amount is different from the Federal Amount. 

I have entered the correct California Amount for Ordinary Income in the CA K-1 Part II Line 9 A.  But I don’t see that the value transfers anywhere in my State TT.   

To make the math work correctly, I have entered the difference between the two amounts on line 14 of CA Sales of Business Property.  That deducts the correct amount from Part II Line 10 - Gain/Loss Amount and then the right amount is subtracted from the Federal PTP Ordinary Income Amount on Schedule CA Line 14. 

Is this a correct (reasonable) way of getting the right data into the return?  I don’t see another way of entering the difference between the two values and reducing the amount of Ordinary Gain that is carried over from my Federal 1040 to reflect the State Amount.

[nexchap]

I'm not familiar with the CA forms specifically, so can't help with exactly where the adjustment goes.  But I did want to point out that you need to make sure you've also been adjusting your carryover losses in prior years.

For non-conforming states, the K-1 box 1 entry is incorrect in the state's eyes:  it includes bonus depreciation.  The K-1, on line 20Z, will give the bonus depreciation included in box 1.  So each year, the state return needs to be adjusted to reflect this.  Typically, all that does is change the suspended losses that carryover to the next year.

The reason this becomes important is that when you sell, that difference you're being shown in Ordinary Income exactly offsets the bonus depreciation that you've been adjusting in prior years.  Entering one, without doing the other, is going to result in incorrect tax calculation.

[drennman]

RisingStar - thank you for the excellent explanation.  I see what you are saying about Bonus Depreciation so I understand the financial math.   Makes total sense that the difference cancels out.  

20Z is a chart, state-by-state that gives the "unallowed" amounts that would be used as a yearly adjustment for your state return.  For the MLP in question, CA is not a state in the chart.  Is there another place I need to look for unallowed losses?  (The total amount question is a rather small number.)   Sorry if this is a naive question.

[nexchap]

On the K-1, there's a line 20 with various codes/values for different tax situations.  One of those codes is usually a 'Z', which is further broken out on another page (20Z1, 20Z2, etc).  If the MLP takes advantage of bonus depreciation, you'll see a line for that.  This is different from the state-by-state chart.
As to whether to use the total value, or the state-by-state, just be consistent.  If you're taking the total Ordinary Gain differential to your CA return, then do the same with the bonus depreciation adjustments.  If you're using state-by-state calculations for Ord Gain, do the same with bonus depr.

[drennman]

Thank you again.  Again, makes total sense.  I like to try to understand what's going on rather than just importing the data from the MLP K-1.   

I think the Adjustment to Basis reflects that part of the income stream you receive from the MLP is a return of capital.  There is no taxable event from this returned capital until a sale.  At that point the Cost Basis needs to be reduced by this returned capital.  Is that correct?  

I don't see what the source of Ordinary Gains are.  On the K-1, Ordinary Income is a negative number.  But from your explanation it could be something to do with depreciation recapture?  I'm just curious to understand the mysterious seeming numbers that show up on the K-1 at a sale.

[nexchap]

The Adjustment to Basis is actually a lot more than the return of capital.  The return of capital is part of it, but so are all the other entries on your K-1.  So, for example, if line 1 on the K-1 showed -1,000, your basis would be reduced by that 1000.  That's where the depreciation and recapture come in.

If you look at Box L on the K-1, you'll see a line "Current Year Increase (Decrease)":  that number is exactly how much your basis will eventually be adjusted for all the non-ROC stuff.  And if you play with the entries on the K-1, you can figure out exactly where it comes from:  its all the entries on the K-1 (except ROC) that you need to pay tax on eventually.

And, if you look at the "Ending Capital Account" in Box L, that will show what your total basis is at the end of the year:  if you did a complete sale, your total Adjustment to Basis would bring your purchased costs down to that amount.

[drennman]

Thank you again!  Really, really helpful. Now I can trace these numbers over time so if I make a sale I will not be "surprised" by the adjustments or gains (nice thing to track in a spreadsheet :--)).  And thank you for taking the time to respond.

[drennman]

nexchap,
I am detailing more info for any others who happen upon this query and its answer.  

Oddly, the first K-1 I looked at did not have the 20z listings (even though it said see STMT (maybe a page was missing?)- that's why I had the confusion over the state chart (which looks to me like something you might need to deal with if you are required to file another state return).  Checking another K-1 after your last explanation, I found exactly that list of 20Z amounts with the 20Z3 as the bonus depreciation for non-confirming state returns.  Now I know what these values mean and how to use them.  

And yes, I can see the Box L amount of Current Year Increase (Decrease) and can track that amount back through the various values of the K-1.  

Thank you again.

[-tax-prep-2018on]

Hello Nexchap,

I'm in process of completing my CA state tax return. I sold shares of PTP, and successfully navigated the Federal return. CA is a non-conforming state and I do not think I have been adjusting State return each year for bonus depreciation, unless Turbo Tax has been doing this without my realizing (I use Easy Step and hadn't realized that I needed to make CA adjustments.  (See question 3 about this.)

 I realize you do not have familiarity with CA state returns, but perhaps you can give me guidance on these questions: 

1. My final K-1 is reporting Gain subject to Recapture as Ordinary Income as $50K (positive); and Adjusted for Bonus Depreciation Recapture Gaines $42K (positive).What number am I reporting on my CA returns? $8K; $42K; $58K; or $92K?

2. Same question for the Cumulative Adjustment to Basis. The Fed number is $-34K; the Bonus Adjustment number is $-24K. Do I use $-24K or some other number to make the Basis Calc which you outlined in a previous message.

3. Is there any way to make an adjustment for NOT having entered all the state numbers in during previous years? \

Thanks for your ongoing help!