1099-B and K-1 Form

[bobp1426]

I know there have been variations of this situation, but sometimes there are conflicting answers.  So here goes.  I bought and sold all my USO ETF in 2020 and received both a broker 1099-B and K-1 for the sale.  On the 1099-B, the cost was $2400 and sale was $3100, or a net income of $700.  On the K-1, the cost was $2400 but the sale was $3220 or a net income of $820.  I entered all the K-1 info as prompted by TT.  Then as not to duplicate the profit, I read that I would simply increase the cost basis of the 1099-B by $120 (the difference in profit).   But in doing that, I still owe more taxes than if I just reported the values of the 1099-B and didn't report the K-1.  I know it is best to report both, but do I adjust the 1099-B cost basis until I have the same tax if without a K-1 or am I missing something?  Appreciate any help.  Thanks in Advance.

[nexchap]

I may be able to help, but first need a little more info.  Typically a K-1 won't report the proceeds from a sale:  your broker sees that information, but the partnership is only notified that you sold xx units.  So where on the K-1 is it telling you that the sale was for $3220?  And how much did you actually sell for (according to your own records)?

[bobp1426]

Under Schedule K-1 "Partner's share of income, Deductions and Credits" item L "Partner's Capital Account Analysis" item "Withdrawals & Distribution" - that is where the value of $3220.  I actually sold for $3,100 per the 1099-B Broker and my records.  No Dividends or other distribution since only held for a few months.  

[nexchap]

OK.  That $3220 is not your revenue.  "Withdrawals" on that line refers to the cost basis you withdrew, not how much you sold it for.

As a simple example,

• if your beginning capital account was $0,
• you bought for $2400:  "Capital contributed"... would show $2400
• every line on the K-1 is 0:  "Current year net income" would show $0
• you sold late in the year for $3100:  "Withdrawals and distributions" would show $2400 -- the value of the capital you originally contributed.

In your case, since you bought for $2400, and received no distributions, I'd assume there's $820 worth of income showing up on the K-1, which is what raises your Capital to $3220.  That $820 is going to show up on your return somewhere (make sure you verify that!), and you'll be taxed on it.  As a result, you increase your basis on your 1099-B by that $820 to avoid any extra taxation.

• In the real world, you spent $2400 and received $3100 for a profit of $700.  You should pay taxes on $700
• In the tax world, you got some phantom stuff on the K-1 worth $820.  So you get to change the basis on your 1099-B to give a Cap Loss of $120.  Again, you pay taxes on a total of $700.

Note that its a little more complicated if the Sales Schedule shows Ordinary Income, but I don't think that applies to USO

[bobp1426]

Agreed, the $3,220 is not the "revenue" per se.  Since "beginning account" was "0", then added capital ($2,400 to buy the ETF).  Then over the holding period had account income of $820,  then withdraw everything ($2,400 +$820=$3,220) leaving the "Ending Capital Account" as "0".  So to make everything balance, I will increase the "Cost Basis" on my 1099-B form (since it's not reported to the IRS) until my tax is the same as it was without the K-1.  Looks like I'll have to add almost $230 to make it balance.  I guess that's because the way a K-1 is treated (short and long term) versus how a simple short term stock transaction is treated.

Thanks for the help 

[nexchap]

@bobp1426 

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@bobp1426 wrote:

So to make everything balance, I will increase the "Cost Basis" on my 1099-B form (since it's not reported to the IRS) until my tax is the same as it was without the K-1. 

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Just to clarify, you're not adjusting the basis to get to a total "tax" number.  You adjust to make sure the amount of income that's taxed isn't double-counted.  The amount of tax you pay on a K-1 investment will be affected by all the different rates the IRS applies to different types of income (int, div, qual div, long vs short term cap gain, etc) as well as any other limitations imposed by your return.  There's no reason for the final tax on this buy/sell to match a similar buy/sell in a regular corporation.

[bobp1426]

Good Morning Nexcap.  I'm a little confused by your answer.   Here is my analysis.  For argument sake, when there was no K-1, my Total Tax on my return for everything with only the $700 gain from the 1099-B was $1,950.  When I add the K-1 form, the Total Tax on my return jumps to $2,011.  So clearly I'm being taxed twice.  This shows up on Schedule D as: Short term gain of $700 (from 1099-B), $328 (from K-1) and Long Term gain of $492 (from K-1).  A total taxation of $1,520 ($700 + $820).   (The K-1 has both long and short term due to Code C - Contracts and Saddles on the K-1).

I agree, I should only be taxed on the short term gain of the 1099-B of the $700.  The easiest way I see to adjust so that my Total Tax due is back to $1,950 is to adjust the cost basis on the 1099-B (since that is not reported to the IRS).  I did this adjustment on the form "Capital Gain Adjustment Worksheet".  In Part II "Manual Adjustment", I entered Code O and a negative $350.  That increased my 1099-B cost basis to $2,750.  Now my Total Tax Due is back to $1,950.   Basically the Long Term gain from the K-1 was counteracted by the 1099-B gain.

So now both are shown, K-1 and 1099-B (needed since sale amount is reported to IRS) and Total Tax Due is back to the original amount (without the K-1).  Does this make sense?  Anything else I should Do?

[nexchap]

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@bobp1426 wrote:

I agree, I should only be taxed on the short term gain of the 1099-B of the $700. 

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@bobp1426 The line above (with my emphasis) is where the problem lies.  You only pay tax on a total of $700, but you don't control the tax rate.  You're going to pay long term rates on $492, and short term rates on $208 ($328 from K-1 and $120 loss from 1099-B after basis adjustment).  Your tax should go down:  because of the way the IRS handles straddles, part of your short term gain became long term gain.  That's a win for you.

Note that it can go the other way too.  If the partnership had reported Ordinary Income, part of your gain would have been taxed at normal, W-2 like levels.

[bobp1426]

Thanks for your help and I think I'm zeroing on it.

OK, sounds good about lower taxes due to short and long term rates, but what do I do with the 1099-B?  If I adjusting the 1099-B cost basis to get back to $1,950 Total Return is not the best method, then what to do adjust the Cost Basis on the 1099-B? 

The Original Cost basis on the 1099-B was $2,400.  It sounds like I should increase the Cost Basis until I have a lost of $120 (difference between 1099-B $700 and K-1 $820).  Is that what you're suggesting?  Please put up some values if not correct assumption.  Thanks again

[nexchap]

@bobp1426 You just add $820 to your cost basis on the 1099-B.  So if you started at $2400, the correct value is $3220.

Its not a coincidence that this matches the "Withdrawals and Distributions" line on the K-1:  the Partnership added $820 to your original basis, and when you sold your basis was sitting at $3220.

[bobp1426]

Thanks for your help - I really appreciate it.  It is amazing that with all these threads on this subject, TT hasn't decided to provide a solution.  I'll go ahead and add the $820 to the 1099-B cost basis which for that transaction gives a loss of $120.  That is $2,400 + $820=3,220.  Sale price on 1099-B was $3,100 less New Cost Basis of $3,220 = -$120.

This actually brings the Total Return below the original basis with only the 1099-B.  New Total Tax, due to long and short term profits from K-1 is now $1,890.   

NOTE: I had followed your previous tread that I found in June 7, 2019 which I assume still applies.  I followed your example, then added the $820 to my cost basis from the 1099-B.  This was your previous example back in 2019:

3) Complete dispositions, all in one holding period:  This is the only case where the K-1 interview works, but you still have to deal with the 1099-B that came in from the broker.

Because of all this, I handle all scenarios the same way:

1. Use the K-1 interview for the 'ordinary gain' portion of the MLP sale, but not the capital gain/loss.  Do this by: 1) enter 0 for sales proceeds, 2) enter the ordinary gain numbers provided on the K-1.  Note that there will be two ordinary gain numbers, one for Regular and one for AMT, and 3) set your basis as the inverse of the ordinary gain (for example, if ordinary gain was 100 (regular) and 90 (AMT), set basis as -100 (regular) and -90 (AMT).  Doing this puts the ordinary gain into all the right spots on your tax return, but sets the capital gain/loss as $0 for both Regular and AMT.
2. Go the the 1099-B provided by your broker.  There will be a cost they provide, which isn't reported to the IRS.  This can be changed, so change it to whatever provides the correct cap gain/loss (you work out the cap gain/loss by using the K-1 worksheet).

[Mike9241]

USO's legal structure is that of a partnership. that's why you got a k-1. so you need to report the k-1 info on your tax return.  in addition, the 1099-B shows only your original tax basis (what you paid to purchase it in the section - cost not reported to IRS section of 1099-B (type B or D depending on holding period)   with the K-1 you should have received a sales schedule which will allow you to compute your correct tax basis which then should be substituted for what's on the broker's statement.  

the 1099-B shows only your original tax basis - the reason for this is the broker receives no updates as to items affecting tax basis such as the income/loss and distributions all of which affect your tax basis 

[LaJolla]

My question is for NexChamp.

I owned a MLP which I sold in its entirety in 2020 and I am having some issues with Turbotax filling in part II Schedule E.  I followed your suggestions (checked Partnership ended in 2020 (final K1), Complete disposition, Sold partnership interest, Purchase date 8/5/2011, sale date 8/5/2020).  Entered the following: (Sale Price: 0

Ordinary Gain from my K-1: 3893, AMT ordinary Gain 3873.

Used Inverse of above numbers as Partnership Basis: -3893, -3873)

The next TT screen Review of Disposition/Sale: $0 short term and $0 long term gain/loss

Form 4797 appropriately shows my Ordinary gain as 3893 in part II box 10 line G.

I checked that I have passive carryover losses and all my investment is at risk and I have all the correct information entered on the PTP worksheets in regards to Ordinary income for Schedule E: In columns (a) I have the current year's Income $194 and column (b) I have my cumulative prior years unallowed losses (-1389) and column (c) shows a net loss of -1195

I believe this should should populate SchE as follows:

Line 28 column (g): 1389  and column (h) as 194   Both as Passive Income/Loss; however, TT entered the net losses from the worksheet on Schedule E line 28 column (i)  NON-PASSIVE Loss. 

I am uncertain if I need to create a separate PTP work sheet and designate this PYA to separately report prior years passive losses so that it populates Schedule E correctly. Or if Schedule E is correct.  Can you help me please?

[nexchap]

@bobp1426 That thread still applies.  Now that you've finished, its still a good idea to just double-check the forms:  make sure there's only one 1099-B (that the K-1 interview didn't create one) showing the correct Cap Loss, and that the other K-1 entries have made it to the right place.

[nexchap]

@LaJolla I believe the Sched E is correct.  While you own the partnership its possible for passive losses to be released to Sched E (e.g., the partnership reports $100 in income, which would release $100 in suspended losses to Sched E).  In that case, that $100 would show up in the 'passive' column reflecting that they're just offsetting passive income elsewhere on the return.  But when you do a complete disposition, those losses get treated as non-passive meaning they can offset any income.  That's why they're appearing in the non-passive column.

Note that I'm not an expert on this, and there may be a tax attorney somewhere who'll argue that the way TT is handling it is incorrect and the program has a long-standing bug, but this is how I've always seen TT handle complete dispositions and the above logic makes sense to me.  Hope that helps.