Basic question on K-1 MLP

[Canonical]

If Box - 1 - income, Box 5-7 incomes(Interest, Dividends, Royalties) and Box 10 (1231 gain) income increases my tax basis, how does TT ensure that these incomes are NOT the part of  'Current year net Income' (section partner account analysis) which increases/decreases my cost basis ? When I sell I will sell based on cost basis set by ending capital account and if the above incomes have already been taxed, after sale wouldn't it be double taxation ?

[nexchap]

@Canonical TT does not track your cost basis.  When you sell, you'll determine your cost basis yourself (using the information provided in the Sales Schedule that comes with your K-1) and enter that into the software.  All TT does is take the numbers you enter in Box 1, etc and move them to the appropriate forms, or put them into suspension for future years.

[Mike9241]

you may have a surprise when you sell.  selling an MLP is not the same as selling a stock. for that you know sales price and cost and hence gain or loss.  selling a partnership interest is actually the sale of the partnership's assets which can generate depreciation recapture that's reported on the sales schedule as 751 gain or gain subject to recapture as ordinary income (other wording might be used) so in these cases, your gain -  sales price less tax basis can consist of two parts capital gain and ordinary income (the 751 portion increases your tax basis reducing the capital gain). not all MLPs have this. it is reported to the IRS on line 20AB (2022 k-1) .  as you can imagine this is almost like selling rental property. the longer you hold it the more depreciation you take and hence the larger the 1250 gain. but for MLPs this depreciation recapture is ordinary income not taxed at the section 1250 preferred rate.   just a warning, but I got burned on one because I held it so long that the recapture greatly exceeded the suspended passive losses. 

[Canonical]

Tell me one thing - If I don't take a royalty interest depletion (20T) against royalty income (Schedule E line 18) will that also be carried over from one year to another ? 

[nexchap]

@Canonical In forms mode, if you look at the K-1 worksheet for the partnership, there's a section A showing "Passive Activity Adjustment to Income or Loss" which will show you the items that are being potentially suspended, or released, in any given year.  So if your depletion expense shows up in column 'a' of that form this year, and isn't allowed (column 'c'), it'll transfer to future years.

[Canonical]

I just  consulted K-1 issuing firm. They mentioned the net income = Sum of Line1,2,5,6a,9a,10 - 13a-13k-18c

How can the sum up 1 (ordinary income) and 2 (rental income). TT asks us to create separate entries for ordinary and rental. So if Ordinary income = $100 and rental income is (loss) = $(20), K-1 is saying net is $80 but TT is saying put separate entries due to which I pay tax on $100 and 0 tax on rental since that is a loss ?

Moreover K-1 says subtract 13 A and 18C entries from ordinary income but TT software does not really reduce ordinary income if I put these numbers ? I have paid substantial extra tax because TT is not working the way it is supposed to ?

[nexchap]

@Canonical TT is working fine.  The tax rules don't let you apply the rental loss against the Ord Income.  That's why TT requires you to put them in separately.  So rather than being able to net the 20 against the 100 today, you pay tax on the 100 today, but the $20 will be suspended and used in the future when you sell.  Similarly, if you look at the codes you're citing, 18C is "Nondeductible expenses" -- they're not deductible on your taxes, though they affect net income -- and 13A is a charitable deduction that will be applied to your return on Sched A if you're eligible to use it.

Overall, the net income formula you mentioned in your post is fine for figuring out how all the entries on your K-1 affect your basis, but the tax code may delay when some are recognized, and it may require them to show up on a variety of different forms.

[Canonical]

But my friend, that $20 rental loss is coming from K-1 and the company issuing K-1 should know how much tax i paid so that they can reconcile. Do they really do that ?

If K-1 says that all these deductions should happen in this year, they should. correct ? Because there is nobody tracking all these amounts other than the company issuing K-1.

[nexchap]

@Canonical Your best bet would be to review the actual instructions on PTPs (page 14 at this link: https://www.irs.gov/pub/irs-pdf/i8582.pdf).  It discusses the special rules around passive income and losses, the exceptions for PTPs, and exactly what types of passive income can be used to offset a passive loss.  Specifically, the rules around PTPs are much more restrictive than general recognition rules. 

Its also worth noting that the formula you got from the K-1 provider had nothing to do with how or when to report different items:  it was strictly how they calculate the change in basis.  The partnership, and the company issuing the K-1, have no idea how much tax you should pay, or when. 

[Canonical]

So, you are saying that how they calculate basis is not how other calculate basis....how will everything get in sync then ? K-1 will report differently and I will report taxes differently - then where is the system of record ? Who will IRS believe in case of a conflict - K-1 or my records ?

[nexchap]

@Canonical Here's an example that may help:  let's say you own the PTP for 5 years.  Each year, if you enter the K-1 information into TT, following all the instructions, your taxes will be filed and paid properly:

• Any source of income, like dividends or interest, will be reported on the appropriate form and you'll pay taxes.
• Deductions that you can be take will be taken
• Losses will be recognized when appropriate, and otherwise suspended.
• Note that the information you enter regarding your capital account (Part II, Section L of the K-1) is ignored by TT.  They don't use it.  Its just for your records.
• Further note:  if your capital account drops below 0, you have to uncheck the "Capital at risk" box in the interview, and things get more complicated.

In year 5, when you sell, two things will happen:

• TT will release any suspended losses, so you get to take them in that year
• The K-1 will include a new form -- a "Sales Schedule" -- which will tell you the basis you should use for your sale.

Hope that helps.

[Canonical]

'

• TT will release any suspended losses, so you get to take them in that year' - OK, so TT stores all losses. How can I review what has been stored over the past years ? This year I added new entries for the same MLP stocks i owned last year instead of what TT automatically added. Will that affect the sum of all losses TT keeps ? I guess TT is intelligent to keep a sum by partnership tax ID# ?

[nexchap]

@Canonical In forms mode you can see the "K-1 Partner" worksheet.  Section A of that form records suspended and current year losses, determines what will be released in the current year, and shows what will be suspended to future years.