How to deal with negative UBTI?

[texmarq]

I received multiple K-1's from MLP's all of which had negative amounts in box 20V.

Had one of these been a positive amount can they all be netted together to stay below the $1,000 reporting threshold?

Are these amounts combined with future years until the MLP is completely disposed?

Does the same apply to the amounts in box 1?

[ScruffyCurmudgeon]

See subsequent answer with more detail

[ScruffyCurmudgeon]

If you are speaking of the exemption on the first $1,000 of Unrelated Business Taxable Income that may be reported and the account holding all the MLPs is an IRA.

I had to outline the following some years ago for several tax-exempt religious organizations that had managed pooled investment trusts, but the material applies to not only Tax-Exempt entities but also Tax-Deferred accounts.

On Holding MLPs in a Tax-Deferred Account or by a Tax-Exempt Organization

1. For purposes of summing together the reported UBTI, the IRA account is allowed a maximum of $1,000 exempted in total, so one would sum up all the positive values reported to come to that total, whether under or over $1,000.  As to applying to that sum any negative UBTI, these rules apply because whether the MLP were held in a taxable non-qualified account or in a qualified tax-deferred account :such as an IRA, the regulations do not allow commingling of the values reported by multiple entities and off-setting passive income with passive loss from amongst multiple entities, with the following specific exception relative to UBTI:
1. negative UBTI can only ever offset future positive UBTI from the same MLP
2. negative UBTI can never directly offset positive UBTI from another MLP
3. the first $1000 of positive UBTI is forgiven each year.
4. negative UBTI is treated as $0 when summing UBTI's across different MLPs in a given year for purposes of determining the gross positive UBTI. 
   
   
2. Therefore, assuming that the IRA Trustee has filed and reported the negative UBTI in prior years and the Trustee and you have in your accounting of the K-1's over the past years accumulated the UBTI separately for each reporting entity, each K-1, then if the entity reporting positive UBTI in excess of $1,000 has a previously reported sum of negative UBTI, that negative sum carried forward from prior years can be applied to reduce the positive UBTI.  Note that the responsibility lies with the IRA Trustee to keep this accounting record and to file each year.
   
   
3. Remember that you, the account holder, are not the reporting party for the tax on UBTI but instead it is the responsibility of the IRA Trustee to report and pay from the proceeds of the IRA account the tax, reported not on a Form 1040 or similar but instead on a Form 990-T [used by tax-exempt entities to report and pay tax on UBTI].
   
   
4. Note that the tax rate imposed is 39.6% [the highest tax bracket for trusts and estates].
   
   
5. Box 1 -if the MLP were held in a non-deferred account instead of an IRA, any passive business income that is "income" - a positive number - would be reported as current year business income and be taxable, but as the account is tax-deferred, the issue of applying tax only arises when the proceeds are distributed from the IRA, so the issue is not relevant, as it will be the gross distribution that is taxable at ordinary income rates.
   
   

Because the MLP's themselves offer considerable tax-deferral in and of themselves when held in a non-qualified taxable account, and furthermore have the opportunity in a taxable account to apply all the previously disallowed passive losses  against business income in the year when the entire holding is liquidated, MLP's are attractive for non-qualified accounts.  Frankly, holding them in Qualified tax-deferred accounts is a questionable benefit.