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Tax Implications of a Publicly Traded Partnership

06/14/2017

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By Briana Mullenax and Sabrina Greninger

What is a Publicly Traded Partnership?

A publicly traded partnership (PTP) is any partnership that is either traded on an established securities market or readily tradeable on a secondary market. PTP investments appear as a stock within a brokerage account, but are taxed as a pass-through entity and issue a K-1 to investors. Sometimes, the broker will include a separate list summarizing PTP investments. A majority of PTPs engage in oil, gas, and other energy-related ventures.

Benefits of a Publicly Traded Partnership

One of the largest advantages of investing in a PTP is that the partnership can avoid corporate tax treatment, if 90% or more of the income is qualifying income. Qualifying income includes interest, dividends, rent from real property, gains from the sale of property, and income from natural resources. This makes the income from the partnership subject to only one level of tax, at the investor level; whereas, if this were a normal stock, it would be taxed at the corporation level and again at the investor level as a dividend.

Another advantage of investing in a PTP is the liquidity of owning publicly traded stock. An investor in a PTP has the benefit of selling interests very quickly through the market, if desired. When you sell your PTP units, your taxable gain is the difference between the sales price and your adjusted basis. Cash distributions decrease basis and are commonly dispersed quarterly. Cash distributions from a PTP are considered a return of capital, and are not taxed as dividends at the federal level.

Complications of a Publicly Traded Partnership

Net losses attributable to an interest in a PTP are not allowed to net against the investor’s other income. When a particular PTP incurs a loss, that loss can only offset future earnings from that same PTP. This is very different from interests in regular, non-PTP passive activities where allocated losses can be used to offset earnings for any other passive activity. These losses can only be realized upon either income recognition from the PTP or a complete disposition of the PTP units.

Complications can occur upon the sale of PTP units. If PTP units are sold at a gain, there is a division between taxing the gain at the preferential capital gain rate and the ordinary income rate. If PTP units are sold at a loss, some of the loss may be disallowed depending on how much income has been recognized previously within that PTP or how much of the PTP units are disposed of. It should be noted that investment brokers rarely track shareholder basis for PTP investments, but an adjusted basis will be shown on the Schedule K-1 when all or some of the units are sold. It gets especially complicated where there are PTP units owned across multiple brokerage accounts. This will cause extra time for tax preparation to distinguish which units sold are coming from which accounts.

A PTP may also operate in a number of states. Because a PTP is a passthrough entity, the investor could be subject to filing tax returns and paying taxes in those states. These potential income taxes and additional tax return costs should be carefully considered when evaluating the economics of the PTP.

Tax planning for PTPs can be challenging because the income from PTPs is often not estimated or communicated with investors before the Schedule K-1 release after year end. Additionally, if there is a sale of interest, the split between capital gain and ordinary income will be unknown since that is also provided as an attachment to the K-1.

Briana Mullenax, a Certified Public Accountant, has more than thirteen years experience and is a Shareholder in the wealth advisors group. She is a Senior Manager in LBMC’s Wealth Advisors Group and her experience includes providing accounting and tax services for clients in a wide range of industries including manufacturing, distribution, food service, construction, healthcare, non-profit organizations, and financial institutions.

Sabrina Greninger, CPA started work for LBMC in 2015. She works in the Wealth Advisors team as a senior accountant. She primarily works with investment partnership, real estate, and individual clients tax returns and consulting.

Posted in: Financial Solutions
Tagged with: wealth management