LTD Partnership Basis Q

[Corduroy Frog]

The formula for partnership basis calls for a decrease if there are nondeductible expenses.  One example is 50% nondeductible meals.

However, in a "limited" partnership, nondeductible losses could include losses disallowed because they are passive.  Question:  Are passive losses required to be deducted from basis according to the formula?

I don't see why they wouldn't but thought I would ask...

[Abby Normal]

If this is a PTP (Publicly Traded Partnership), you don't need to track basis. But if this a regular limited partnership, yes, basis is increased by taxable and nontaxable income and decreased by deductible and nondeductible expenses/losses. So basically everything in and out.

If you didn't allocate basis to passive losses, there'd be no basis for deducting those losses later.

[Corduroy Frog]

Thank you Mr. Normal.  This is a PTP.  Taxpayer paid $175,000 for it, and has been reporting income for 5 years, and has been also receiving distributions which are not necessarily equal to the income.  Will sell in 2025 for $200,000.  If there is no need to track basis, then is it as simple as reporting $25,000 LTCG?  Can't find this in IRS Sch D instructions, and not sure I would understand it anyway.

[Catherine]

13 hours ago, Corduroy Frog said:

This is a PTP.

Upon sale, the partnership *usually* provides a worksheet for reporting the sale. This is separate from the K-1 (although sometimes appended) and also separate from any brokerage Schedule D-style reporting. In the worksheet, information is provided for determining LTCG, Ordinary Income, Form 4797 sale of business property items, and more. Look for that. 

[Abby Normal]

When these K1s are sold, either partially or completely, the broker will normally show the initial investment cost, but the K1 will have attachments showing both a basis adjustment and an ordinary income component of the gain or loss. The basis adjustment increases the gain and the ordinary income component will decrease the gain on the Sch D and also be reported on the 4797 (as Catherine already noted).

On 8949, you will use adjustment codes BO to net the two adjustments so the Sch D gain is correct. You can do this even if you're reporting totals from the 1099-B.

And the state gain or loss is almost always different, so you'll need an adjustment on the state return, if there's a state income tax. 

When I see these investments by a client, I always warn them that their tax prep bill will be higher every year that they own them and a lot higher when the sell them.

[Catherine]

2 minutes ago, Abby Normal said:

And the state gain or loss is almost always different, so you'll need an adjustment on the state return, if there's a state income tax. 

Yes, there is usually a separate chart of state adjustments (since these are sold all over). Forgot about that; thanks, @Abby Normal. Lucky me, as I haven't seen one of these in a while. I think everyone they got foisted off onto... umm, I mean sold to, yeah, sold to... either dumped them or was elderly and has passed on. I also pointed out how much more the tax prep bill was and compared that to the distributions they got (usually not particularly favorable). Not investment advice! Just cash flow analysis.

[Corduroy Frog]

Thanks for the responses.  The sale will not occur until 2025, so I will not be able to advise about this until we have the information of which you speak.  Interesting...

[mcb39]

I could get into this discussion because I prepare Partnership returns; but I won't.  I believe we are talking here about the multitude of small limited partnerships that so many of our clients are coming in with this year.  Many of them were late and I had more than one amendment because of it.  When I prepare a Partnership, I have to have it filed by March 15 or file for an extension.  I get my K-1s out on time for my active partners.  Why is it that brokers seem to have forever to deliver?

[Lion EA]

Frog: you CAN warn him that the sale might not be all capital gain rate, that some could be at his ordinary income tax rate. Was he near the top of a bracket last year?

And, that the sale involves more time, more calculations, often more forms, so your fee will be a LOT higher.

Tell him to bring you every single page and every single piece of paper and every single mailing for year end.

[Corduroy Frog]

Good advice from all.  I have told him to expect anything.  And, yes, his AGI was $750,000 this year.

[Sara EA]

These PTPs are notorious for showing losses year after year yet making nice distributions so investors think they are making money.  It's return of capital, lowering basis and adding to the surprise gains when they eventually sell.  At least they can take those suspended losses at the end, mitigating the tax bite a bit.  Always check that the K-1 is in the taxpayer's Soc Sec number and not in an IRA, in which case you don't have to do anything except alert the client that the custodian may have some UBI reporting.

[Corduroy Frog]

2 hours ago, Sara EA said:

These PTPs are notorious for showing losses year after year yet making nice distributions so investors think they are making money.  

Yes Miss Sara, that is exactly what has been happening.