A Publicly Traded Partnership (PTP) usually has passive income (interest, dividends, real property rental income, gains from selling real estate, mining and natural resource income, gain from selling capital assets and property held for the production of such income). A Publicly Traded Partnership gives the investor a Schedule K-1 form that shows the types, kinds and amounts of income or loss the investor is to report on their individual income tax returns.
Because a PTP usually has operations in most if not all states, the income earned in each state is shown. If the amounts are significant, it means the investor is to file state income tax returns as well as the IRS (federal) return.
The instructions for PTP Schedule K-1 are a wonder! Lots of special tax rules that may apply (or not). The distributions from a PTP to the investor probably include some of the investor’s own money. The distributions are not what is taxable. The income (or losses) on the Schedule K-1 form are what is reported for income tax purposes.
The Passive Activity Rules frequently mean the investor may not have a current loss to report (claim against other income), but instead has a Passive Loss that is carried over until that PTP has income or the investment is sold. Keeping track of the tax basis in a PTP is important and complicated.
Some folks have been sold investments in PTP that only complicate their tax returns, without a lot of income or benefit. PTPs have lots of expenses that reduce the income.
If you must buy an interest in a PTP, it is really best to have it be an investment in your IRA or retirement account. That way all the fancy, complicated rules don’t apply and the individual income tax return is not involved in that investment.
Usually we see small investments in a PTP that complicate the individual return and just require a lot more time to prepare the return. With only a small investment, we don’t see the benefit of those investments except in an IRA or retirement plan. Even then, it is not going to be a big deal if you only invest $10,000 or so. But the selling stockbroker that gets a commission on the purchase and the later sale.
If you want to invest in energy, why not do selected stocks or ETFs (electronically traded funds)? Until we have real tax law reform, PTPs are not an investment for most clients. Maybe Mitt Romney can benefit from them, but they may be just another investment in his IRAs?
If you individually own a PTP, it might be best to sell it and simplify your life. If you are considering an investment in a PTP, think twice before making that investment as an individual owner.
Did you hear? “To one that does not know, a small garden is a forest” — African proverb.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.