This is a problem that can occur when someone has held MLP units for many years. And unfortunately, it doesn't have a simple answer. Basically, your adjusted basis can't go below 0. If it has, then you may need to amend past tax returns, identifying the year when it reached 0 and changing your returns from that point forward:
There are 3 phases to MLP taxation:
1) The early years, right after you buy it, when you have Capital at Risk AND Basis. You've put capital (your purchase price) into the partnership. You have "capital at risk" (one of the questions TT asks about each year). During these years, you enter your K-1s "normally". You also have "basis", which is the sum of your capital and any nonrecourse loans the partnership allocated to you (section K of the K-1)
2) Later on, when you still have Basis, but no Capital at Risk: At some point, as the partnership registers losses and steadily adjusts your capital downwards, you'll see Section L of the K-1 approaching 0. When it hits 0, you no longer have "capital at risk". At this point, you stop checking that box, different forms come into play, and suspended losses are handled differently (which effects what happens when you sell). But, in this phase, you may still have "basis", since your share of the nonrecourse loans (section K) may still offset the negative capital.
3) Still later on, when you don't even have Basis: at this point, all distributions received have to declared as "Distributions in excess of basis" and you pay capital gain taxes.
This is the point where I suggest seeing a tax professional, because phases 2 and 3 are complex, probably require keeping your own records outside of TT, and definitely require using your own numbers when it comes time to sell and calculate your final gains.
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**Note also, I'm not a Tax Preparer/CPA. Just a volunteer, seasoned, TurboTax user.
Use any advice accordingly!
