MLP at risk rules

Forum|Forum|5 years ago
March 12, 2021
1 reply
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Hello,

I have questions regarding an MLP (oil and gas PTP) .

1. On the K-1 part two, box 12J has all positive percentages for profit, loss, and capital. Box 12K has positive numbers for non-recourse partners share of liabilities. Box 12L has a negative ending partners capital account.

Should I check the TT box for being at risk because the combined total of share of liability and ending capital account is positive, or am I not at risk because only the ending capital account is negative? I believe the negative capital account is taxed as a capital gain.

2. When selling this MLP, there were passive losses allowed and passive losses not allowed. Will the unallowed passive looses be released to offset ordinary income of this MLP sale? If not, the the losses be used to offest other non mlp income?

Best answer by nexchap

You appear to be assuming that "investment at risk" and "basis" mean the same thing. They are different.

The quote you included only discusses basis. It doesn't mention "investment at risk". And what it says about basis matches my previous answer: you don't have to declare distributions as capital gains until your basis goes below 0.

But "investment at risk" is different. Its literally referring to your investment: the amount you put into the partnership yourself. You didn't actually invest any of that "nonrecourse debt" money, and you're not liable for it. So it doesn't count as "investment". Your "investment" is what Section L is tracking. When it reaches 0, the partnership is telling you that it has returned (from a tax standpoint) every penny that you gave them. Some of it came back to you as actual distributions. Some of it came back as losses which are suspended until you sell (but when you sell, you'll get to put them on your taxes offsetting other income). So from a tax standpoint, you don't have anything "at risk". If the partnership disappeared tomorrow, you've already gotten all your money out.

I hope that makes it clearer.

N

nexchap

Level 9

On your questions:

There are two important numbers for partnerships: how much "capital" you have at risk, and how much "basis" you have. Your basis is the sum of nonrecourse loans plus your ending capital account. But your capital at risk is only looking at your capital account. So if that's negative, you no longer have capital at risk.
Since you said line J was all positive, I assume you did a partial sale? TT will release passive losses to the extent that there is offsetting income, so if you have adequate losses they should cover your ordinary gain. Suspended losses will only be released completely, and be available to offset other non-mlp income, when you sell completely.

One final note: if you have no capital at risk, but still have basis, your statement about "negative capital account is taxed as a capital gain" isn't quite right. Distributions "in excess of basis" are taxed as capital gain. But if you still have basis, that doesn't apply. What DOES happen is that a bunch of your losses are going to get suspended on form 6198 -- a special purgatory for losses that you won't be able to ever use unless you add more capital to the MLP. So if you did a complete sale there's a portion of your losses that can't be claimed.

**Say "Thanks" by clicking the thumb icon in a post. **Note also, I'm not a Tax Preparer/CPA. Just a volunteer, seasoned, TurboTax user. . Use any advice accordingly!

M

mlpabc1980Author

Level 2

I did not sell any of the mlp this year or any prior years. Here is the k1.

Beginning. Ending

12 J. Profit. .000082%. .000080%

Loss. .000082%. .000082%

Capital. .000082%. .000080%

Beginning Ending

12K. Nonrecourse 29020 26225

Qualified nonrecourse refinancing. 0. 0

Recourse. 0 0
12 L. Beginning capital account. 3089

Capital contributed during year 0

Current income or loss. 107

Other increases or decreases. 0

Withdrawals and distributions. (3204)

Ending capital account (8)

I did not check the box in TT for having all of my investment at risk. Hence, disallowed and allowed losses were on form 6198. Also, I put the the loss of 8 as a long term capital loss.

Now , I believe that all my investment is at risk. I infer that I am at risk based on this information from the K1 instructions for item K: “ Your share of nonrecourse debt increases your tax basis in the partnership interest and allows you to treat distributions as non- taxable return of capital. However, if your current year distributions exceed your tax basis, including non recourse debt allocated to you, the excess distributions are reportable as capital gain.” Hence, the box in TT should be checked stating “ all of my investment in this activity is at risk”.

MLP’s are maddening . I dont want to sell it but I dont want to buy more shares and above all I dont want form 6198 to steal my passive losses.

N

nexchap

Answer

Level 9

You appear to be assuming that "investment at risk" and "basis" mean the same thing. They are different.

The quote you included only discusses basis. It doesn't mention "investment at risk". And what it says about basis matches my previous answer: you don't have to declare distributions as capital gains until your basis goes below 0.

But "investment at risk" is different. Its literally referring to your investment: the amount you put into the partnership yourself. You didn't actually invest any of that "nonrecourse debt" money, and you're not liable for it. So it doesn't count as "investment". Your "investment" is what Section L is tracking. When it reaches 0, the partnership is telling you that it has returned (from a tax standpoint) every penny that you gave them. Some of it came back to you as actual distributions. Some of it came back as losses which are suspended until you sell (but when you sell, you'll get to put them on your taxes offsetting other income). So from a tax standpoint, you don't have anything "at risk". If the partnership disappeared tomorrow, you've already gotten all your money out.

I hope that makes it clearer.

**Say "Thanks" by clicking the thumb icon in a post. **Note also, I'm not a Tax Preparer/CPA. Just a volunteer, seasoned, TurboTax user. . Use any advice accordingly!