Making Sense of Master Limited Partnership Tax Rules

by Mary Lyman

So you’ve finally bought some shares in a master limited partnership (MLP) after hearing everyone rave about this equity investment that gives you a high yield, pays out cash every quarter and has tax advantages.

A couple of quarters go by, your investment pays off as promised, and you’re a happy camper. Then tax season rolls around and instead of the familiar Form 1099, a new form called a Schedule K-1 (Form 1065) shows up in the mail, with numerous boxes labeled with different types of income and deductions. What’s going o

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Mary Lyman is executive director of the National Association of Publicly Traded Partnerships (NAPTP), a trade association of publicly traded (“master”) limited partnerships.


Discussion

Sebastian Lasher from Virginia posted about 1 year ago:

What tax software programs do you recommend to handle the K-1s?


Walter Wiatre from Florida posted about 1 year ago:

Will Turbo Tax automatically compute the K1 information on my Tax return?


Gerald Lanois from Florida posted about 1 year ago:

Comments above don't seem complete, re MLPS in IRAS.
What's missing, is taxation on sale of an MLP in an IRA.
Also, how tax is payed--ie who prepares the tax statement??
NAPTP is wholly incomplete on this issue.
Please publish the answers to above, for the benefit of the members??


Charles Rotblut from Illinois posted about 1 year ago:

Walter - Here is what Intuit says about Turbotax and the K-1: http://turbotax.intuit.com/support/iq/Investment-Income/Schedule-K-1-Information/GEN12344.html

Gerald - Capital gains realized in an IRA from a MLP are not taxed. As the article states, UBTI can be, if it exceeds a certain level.

-Charles


Joseph Steffan from New York posted about 1 year ago:

TurboTax does MLP K-1s easily, the cheapo programs either don't compute MLP K-1s or prove totally difficult to enter MLP K-1 info.


William Marley from Virginia posted about 1 year ago:

How does one handle MLP gains in a Roth IRA.


David Phillips from Alabama posted about 1 year ago:

I have been under the impression that for capital gains tax purposes, the original basis is used to calculate the gain or loss. There is of course recapture on the portion of income that was tax deferred. This is based upon the example in the old Wachovia MLP Primer.

Table 2 is the same info contained on the NAPTP web site and I would like to have this clarified please.


F paul Brady from California posted about 1 year ago:

Yes, the K1's are not that difficult using Turbotax. One problem I found is that the information from the MLP often arrives very late so one has to wait until early April to finish putting the info into the forms.


Greg Mckelvey from Georgia posted about 1 year ago:

@F paul Brady: Good point. The deadline for issuing a K-1 is March 15th, unlike a W2 which is Jan 31st, for instance. It can be anxiety-producing if you aren't expecting it.

If you prepare your own tax return, I usually prepare it when I have all w2, 1099-x, etc. forms. I add the K-1 info as I receive them. Entering everything but the K-1 info early allows time for review and discovery of potential problems with enough time to correct them. [Like better planning of 1040-ES payments next year! :-) ]

If you have someone else dong the preparation, I would submit all information minus the K-1 forms as soon as I have it. That allows the preparer to enter the information and just complete the 1040 when the K-1 becomes available. That should result in a better quality (accurate) return, rather than delivering a whole sheaf of tax information during the CPA's "crazy season".


Gerald Lanois from Florida posted about 1 year ago:

CHARLES,
THE FOLLOWING IS A RESPONSE FROM THE AUTHOR:


RE: My post about your recent article in Nov 2012 in AAII








Hide Details
FROM: mlyman@naptp.org
TO: gdlanois@yahoo.com

Message flagged

Thursday, November 1, 2012 5:40 PM







Thanks for your comment. I generally don’t get into the issue of taxation on the sale of an MLP in an IRA unless specifically asked, because it is not a completely settled issue (the IRS has never ruled on this question) and I am not a tax advisor. It is clear that the portion of gain from the sale that would be taxed at the capital gains rate in a capital account will not be taxable to the IRA. The question is, does the IRA have to pay tax on the recapture portion, the amount that is taxed as ordinary income in a sale from a taxable account? Of the MLP tax experts I’ve consulted—some tax lawyers, some accountants—some feel that there’s an argument to be made that the transaction would be completely tax free to the IRA. Others argue that there is only one interpretation, that because the tax code gives precedent to depreciation recapture over any other rule, the recapture amount is treated as unrelated business income and the IRA must pay tax on it. All agree that the IRS would take the latter position; the only question is which position would prevail in the Tax Court and any subsequent appeals. Again, I don’t give tax advice, but the safest route is probably to assume that recapture applies.



The article actually does indicate how the unrelated business income tax is paid (unless it was edited out; I haven’t seen the published version), as does the material on the subject on the NAPTP website: it is the responsibility of the plan’s custodian—for example, Fidelity if you hold your IRA in a Fidelity account—to file the appropriate tax return (Form 990-T) and pay the tax out of the IRA’s funds. Perhaps I should have emphasized this more, as there is a of lot confusion among investors about how affects their taxes. If you are the beneficiary of the IRA it has absolutely no effect on your taxes—the IRA itself is the taxpayer owing money to the IRS, and any tax payments come out of its funds not yours.



Feel free to post this reply


Robert Carr from New York posted about 1 year ago:

And folks wonder why we need a simplified tax code. Nice Job Mary.


Henry Absher from Georgia posted about 1 year ago:

I had been using TaxCut for years but it doesn't automatically handle the MLP K-1's. Switched to TurboTax several years ago and that works fine for me.


Herbert Edminster from Kentucky posted about 1 year ago:

All of the discussion on MLP taxation appears to reinforce the conviction some people have that the USA is in need of a serious rework of our tax law patchwork. I assist elderly people with taxes, including some K-1's, through the AARP volunteer network and even people with modest incomes are overwhelmed by some tax considerations.


Bill Askwyth from Florida posted about 1 year ago:

When dealing with multiple MLPs in an IRA (a Roth IRA) is the exemtion $1000 per MLP or $1000 for the entire IRA.


John Brennan from Texas posted about 1 year ago:

It should be mentioned that there are at least three MLP based stocks that pay stock dividends or cash based on the parent MLP--KMR (KMP), EEQ (EEP), and LNCO (LINE). This means no K-1 and no tax hassels.


Dean Fisher from Texas posted about 1 year ago:

When you sell your MLP does the company provide information on cumulative distributions and adjusted basis or do you have to go back to your K1's from each year of ownership and add it all up? I use Turbotax for my K1's, BTW.


Richard Sturgill from California posted about 1 year ago:

I have been preparing my own taxes since 1991 using TurboTax and its prior versions. I started doing this because when I sent my tax info to my accountant it would be after April 1st each year and he would then request to file an extension in August. So, I got the same software he used and began preparing my own returns on time. He would then review my return and make any corrections if needed then he would file an amended return. I never needed to file an amended return so this has worked well. In a few years I stopped having my accountant review my return. After I file my return, I make a copy of the filed return and use it as a template to estimate the following year's return as the tax data changes such as; deleting the prior year's income, capital gains/losses and dividends then I enter the current year's income, capital gains/losses and dividends. I keep the same K-1 data and deductions from the prior year because it is nearly the same for the following year. When the following year's TurboTax software is released, I transfer all the information from the prior year's return and then use the template to enter the changed data and update the K-1s as they are released. Using this procedure I never have any tax surprises and I always know what my tax situation will be ahead of time.


Howard Winegarden from Oregon posted about 1 year ago:

One of my MLP's has come in real late (EPD). In order to expedite this, and avoid the hassle of a late report, I use the following website to get it on to the CPA:

www.taxpackagesupport.com


Howard Winegarden from Oregon posted about 1 year ago:

Having sold KMP, after 10 years, I found the recapture rather ominous. I thought that the reduction in tax base was the long term tax, and that was it. Now, my MLP investments will ride with me to the estate!


G Bruggeman from Massachusetts posted about 1 year ago:

Fabulous article. information that needs to be repeated every year or semi annually.
thanks


L Woolford from Wyoming posted about 1 year ago:

Based on the above MLP article, I assume that holding a MLP in a Roth IRA avoids the need to process the K-1 through yearly federal and state tax filings.

I make this assumption based on the Roth IRA process that income is tax free as long as the rules are followed (ie after five years, withdrawals are tax free).

Comments/replies are invited.


John Callahan from California posted about 1 year ago:

K-1 schedules Turbo Tax Business edition generates K-1's (1041) for estates, trusts.
MLP will generate K-1's ( 1065 ) , send them to unit holders in February, March following particular tax year in question. Hence, you need to specify in your question what type of K-1 are you referring? Thanks; john 1/15/2013


Charles Rotblut from Illinois posted about 1 year ago:

FYI.

A member asked if the unrelated business income tax rules also apply when a MLP is held in a Roth IRA. I checked with Mary about this and she said the rules apply, regardless if you are holding the MLP in a traditional or a Roth IRA.

-Charles


Wesley Davis from California posted about 1 year ago:

turbotax should put out to all their
customers a detailed explanation of how
to handle tax accounting for MLPS from
purchase to completion of sale. that would
put them way ahead of other tax prep programs
and create many happy customers.


Wesley Davis from California posted about 1 year ago:

turbotax should put out to all their
customers a detailed explanation of how
to handle tax accounting for MLPS from
purchase to completion of sale. that would
put them way ahead of other tax prep programs
and create many happy customers.


William Briggs from Maryland posted about 1 year ago:

Roth IRA question for MLP's was never answered until end of post and apparently it was answered by a customer. Strange. Maybe he's right, maybe wrong? Leaves one in limbo. Best and simplest was the MLP's that pay dividends or cash.KISS


Samuel Shepard from Louisiana posted about 1 year ago:

Avoid all the tax mess. Invest in an ETF.
ALERIAN MLP ETF (SYMBOL, AMLP)
They invest in several MLP's and do all the tax work and distribute dividents just as a mutual fund does.


Lee Hausman from California posted about 1 year ago:

Can someone summarize the pros and cons of holding a MLP in a Roth IRA? Thanks


Mike Harrington from New York posted about 1 year ago:

great story any ideas KMR IN IRA DID NOT KNOW THEIR WAS ETF IN MLP THANKS MIKEEEEEEEEEEEEEEE


Mike Harrington from New York posted about 1 year ago:

CAN I EMAIL THIS STORY TO MY SELY MIKEEEEEEEEEEEE


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