MLP Stock sale and Schedule K

[jmhart49]

I sold an oil stock (master limited partnership) last year after owning it 5 years. Each year this stock gave dividends but they were not on the imported consolidated 1099DIV. Each year’s schedule Ks showed a distribution that was close to the dividend but not an exact match. Were my dividends reports in the schedule K or do I need to include them with the sell price? I did download and include the schedule K with each year's tax filing.

[GeorgeM777]

Yes, your dividends and distributions were likely included on your Schedule K-1.  As a way of background, an MLP tax filing is somewhat more complicated. Limited partners in an MLP receive a Schedule K-1. It lists all the income and deductions associated with the partner’s holdings. To start, the payments received by MLP investors are often called dividends, but they aren’t dividends like investors in stocks or mutual funds receive. These distributions generally represent only the investor’s share of the MLP’s net cash flow.

Unlike corporate dividends, an MLP’s cash distributions are considered a return of capital (ROC) and used to adjust the individual partner’s cost basis when the units are sold. At that point, the portion of the sale proceeds that results from adjusting the cost basis downward by the amount of the accumulated distributions, deductions, and depreciation becomes taxable as ordinary income, while the remaining portion is taxed at the capital gains rate.

The ROC portion of a distribution is outlined in the annual K-1 form that all MLPs send you at tax time.   The ROC portion of a distribution, rather than be taxed right away, instead decreases your cost basis, potentially all the way to zero.  At that point the distributions are taxed as long-term capital gains, just like qualified dividends. When you sell an MLP, then the government will recoup those deferred taxes, because your capital gain will be larger by the amount of your cumulative ROC.

@jmhart4

[Mike9241 · Accepted solution]

since you sold it in 2021 your K-1 package will contain a supplemental schedule for computing the capital gain and ordinary income from the sale. do not file until you get it. if you do you'll have to amend because the broker's statement showing the cost (tax basis) is wrong. it uses your original purchase price.  your actual tax basis will be different. the type of IRS reporting for 8949 purposes will be code E which means cost basis not reported to IRS. you will have to substitute on the 8949 the reported cost for your computed cost 

also on the K-1 worksheet in Turbotax you'll have to report the ordinary income portion from the sale (if there is any - it may be labeled 4797 income, ordinary income, gain subject to recapture as ordinary income or another verbiage) you report this  as the sales price

cost is $0

and then you enter the sales price as ordinary income the will flow to form 4797 line 10

[jmhart49]

Certainly helps to understand MLPs with taxes.

Thank you

[jmhart49]

This reply gave me enough info/instructions that I feel confident that I am completing my taxes correctly for a schedule K stock that was sold.

[jmhart49]

Finally got Sched K-1 including the 2021 Sales Schedule with the significant dollars for last year.

Now, I'm a little confused. It agrees with you that I should make 'gain subject to recapture as ordinary income' as a negative adjustment, and that I should include this on Form 4797.

Making the adjustment to 8949 decreases my taxes and maybe it should if I had Form 4797.

However, there is no Form 4797 in Turbotax and per a community response on 4797, there is no way to insert forms that are not automatically created.

Suggestion?

[jmhart49]

I read some additional documents and then reread the Sales Schedule focusing on the bottom and not the top. I now believe my taxes are correct but I'm still confused about the need for a Form 4797 and how to get it in Turbotax.

[FangxiaL]

Form 4797 should be available.

Go to Tax Tools >>Tools to open the Tools Center, click on Delete a form, and scroll down the list of forms to see if Form 4797 has been generated.

@jmhart49

[jmhart49]

Thank you. I was able to open the form going to Forms View then clicking the 'Open Form' button which allowed me to search for 4797 and opened it. I still need to insert data and see if it populates to other forms automatically. It might just generate an error later because I've done overrides on forms created during the step-by-step process and gotten an error stating I cannot do that. I'll do another reply and let everyone know if this works.

[nexchap]

@jmhart49 Form 4797 is filled in by TT when you enter the sale of the MLP in the K-1 interview.  There's a screen where you can enter the "Ordinary Gain" from the sales schedule.  This will then flow to 4797 for you.  Note that you don't want any other sale information to go into this screen, so set sales price to 0, and set partnership basis to the inverse of the Ordinary Gain (so if Ord Gain was 100, basis is -100).  Do this correctly, and the next screen will show 0 for short and long term gains, but 4797 will show the Ord Gain.

[jmhart49]

I have entered my data as I believe it should be but my taxes do not look right.

If I clear the sales proceeds and cost (make them $0) my fed return is $882.

Here are the amounts on the Sales Schedule

I have included form comments from the Sales Schedule

Sales proceeds $0 (but this was actually $9308) – form 8949 col D

Purchase price $13,501

Cumulate adjustments ($5695)

Cost bases $7806 – Form 8949 col E

Gain subj as ordinary income $3734 - Form 4797 part II line 10 and 8949 col G

Note that this is a capital loss with distributions of $2716 over 3 years.

The Sales Schedule is clear that $3734 should be negative on form 4797 but unclear if is should be negative or positive on form 8949.

When I make these entries

Box 1d sales proceeds $9308

Box 1e cost $0

Check cost basis incorrect and enter $7806

Check an adjustment is required and enter ($3734)

This makes my capital loss of $2332.

My fed refund jumps to $1110.

TT puts nothing on form 4797 line 10.

If I manually enter $3734, my fed return drops to $282.

Maybe I’m being too simplistic, but with a Cap loss of $2332 and distributions of $2716, I would expect my fed taxes to be just a little more then if I had no sale which made my fed return $882.

[nexchap]

@jmhart49 I'm not completely clear on where you're making the entries.  So first, there will be 3 spots where this sale will show up:

- When you complete the K-1 interview correctly, the Ordinary Income of 3734 will appear on form 4797.  It will be positive.  This is Income.  You pay taxes on it.

- When you complete the 1099-B correctly, you'll enter 9308 for Proceeds and 11,540 for Basis.  The 11,540 is your purchase 13501 less your adjustments 5695, but adding back the 3734 being reported as income on 4797 = 11,540.  This gives a capital loss of 2,232.

- Finally, you've had suspended losses on your return for each year you've had the investment.  When you do a "Complete Disposition" those losses are released to Sched E.  Those losses, plus the -2232 Capital Loss, plus the 3734 Ord Income is your total tax impact.

Note that you're focusing on the distributions of $2,716, but your partnership gave you that cash PLUS all the other tax entries on the K-1.  All those other entries are why your Cumulative Adjustments were $5695 and not just the $2716.  That's why the Suspended Losses appearing on Sched E are important.

As a final reconciliation, if you think about it purely from a cash in vs cash out standpoint, you spent $13,501 and you received $9,308+$2,716 = $12,024.  So a loss of $1,477. 

- On your tax return, you'll see $3,734 of Income (Form 4797), a loss of $2,232 (1099-B), and I'm betting roughly a loss of $2,979 on Sched E.  The total of those 3 is the $1,477 cash loss you saw in your wallet.

[JNKLQ]

Where (in TurboTax) is the sale of a "Master Partnership" stock entered?

Since the sale of the stock is a "return of capital," it doesn't seem appropriate to enter it into the Section:

Turbotax --> Personal -->Investment Income--> Stocks, Mutual Funds, Other

 - This Section states nothing about K 1's

 - There is nothing in this Section that appears to integrate the (->Investment Income--> Stocks, Mutual Funds, Other) entry with the info entered in K 1 Section.

Turbotax states you need the Business Edition if you are entering info related to a Partnership (i.e. "Master Partnership")

And it's not clear if (and how) to enter it into the Business tab if it is considered selling interest in a Partnership.

[RobertB4444]

The K-1 income still needs to be entered into the tax return for the year of the sale, if there is any.  But the sale of your partnership share is indeed entered as 'Stocks, Mutual Funds, Other'.  It is the other.  Enter in the amount that you received as well as the amount that you paid.  Since, in this case, they are the same number, the net will be zero.  It is just a transaction report.

@JNKLQ 

[JNKLQ]

PLEASE READ THE POST - by

Mike9241 – At the TOP of this discussion

Level 15

‎February 23, 2022 11:14 PM

Specifically - .., your K-1 package will contain a supplemental schedule for computing the capital gain and ordinary income from the sale. … the broker's statement showing the cost (tax basis) is wrong. it uses your original purchase price.  your actual tax basis will be different.

Specifically Regarding: "your K-1 package will contain a supplemental schedule for computing the capital gain and ordinary income from the sale"

PLEASE NOTE: There are 11 columns in the Supplemental Schedule - 4 of the 11 are related to Cost Basis.  

PLUS the K1 has a “Beginning Capital Account” field – It doesn’t match the Supplemental Schedule figures

MOREOVER the Supplemental Schedule verbiage doesn't match (align) to any of the verbiage in the TurboTax entry fields

In the TurboTax fields – in which fields are which amounts entered. Does it get checked as a corrected basis?