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August 02, 2017 | Posted in:

Why Does Investing in a Publicly Traded Partnership Make My Tax Return More Complicated?

In addition to individual stocks, many brokers recommend investments in publicly traded partnerships (PTPs).  If this is just another investment, what is the big deal?  The investment objective of owning stocks and PTPs may be similar, which is to earn some income during ownership and hopefully sell for a higher price at some point in the future.  The methods of reporting the income and gain or loss upon the sale of these two types of investments is substantially different, however.

 

What is the difference between a stock and a PTP?

When you own a stock, the corporation files a tax return and pays taxes on the profits.  A portion of the profits may be paid to the stockholders as dividend income.  This is either paid to you in cash or used to purchase additional shares if you choose the reinvestment option.  The dividends are reported as income on Schedule B of your tax return.  If you sell the stock, you compare the purchase price to the selling price and report the resulting gain or loss on Schedule D of your tax return.

An interest in a PTP (or any type of partnership) is a partial ownership in a pass-through entity.  This means that unlike the corporation, the partnership does not pay taxes on its profits.  Instead, all items of income and deduction are passed through to the owners who then report each of these items on their own individual tax returns.  The different types of income retain their characters when passed to the partners.  This means one partnership may pass through several different types of income which must be reported in several different places on an individual tax return.

 

How is PTP income reported?

The income items are reported to the partner on a Form K-1.  It would not be unusual to see ordinary business income and rental income which would be reported on Schedule E, page 2; interest or dividend income which would be reported on Schedule B; royalty income and deductions which would be reported on Schedule E, page 1; long-term or short-term capital gains which would be reported on Schedule D; section 1231 gain or loss that would be reported on Form 4797; investment interest expense which would be reported on Schedule A; foreign taxes paid which would be reported on Form 1116; and alternative minimum tax adjustments which would be reported on Form 6251.  Some more complex PTPs may report even more types of income and deduction.  Additionally, if there are passive losses in excess of passive income in a given year, the suspended passive losses must be tracked and carried forward.  Obviously, the need to report income on so many different forms adds to the complexity of the tax return in a significant way.

 

What happens when a PTP investment is sold?

Selling interest in a PTP causes its own complications.  You can buy and sell units of a PTP just as you can any stock.  When you sell PTP units, a special calculation must be done.  First, the purchase price is compared the selling price, just like for a stock.  This difference is usually shown on the broker statement at the end of the year.  This is not the taxable gain or loss, however.  The total gain or loss must then be adjusted for all of the income and deductions recognized during the period of PTP ownership.  The adjustments must be allocated between items of ordinary income and capital gain income to determine the resulting gain or loss to report on the tax return.  Part of this gain or loss may be reported on Form 4797 and part may be reported on Schedule D.  If you buy and sell different blocks of units at different times, the gain or loss calculation must be done separately for each block.

Although many investors in PTPs have a paid tax preparer to worry about all the reporting and forms, it is important to know that the added complexity will likely increase the fee charged for the tax return preparation.  When considering an investment in a PTP, make sure your broker can show you how the overall return or gain will exceed the costs and expenses associated with this type of investment.

 

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Author:

Associate Partner
 
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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