Investing in Publicly Traded Partnerships? Know Your Record Keeping Responsibilities! (article)

Investing in Publicly Traded Partnerships? Know Your Record Keeping Responsibilities! (article)

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Investors looking for cash flow are often introduced to publicly-traded limited partnerships ("PTPs") as an addition to their investment portfolio. If you are contemplating such an investment, make certain you consider the additional tax recordkeeping requirements of PTPs.

As the name implies, PTPs trade just like any other publicly-traded stock. If they meet certain requirements, however, they are subject to the generally more favorable tax treatment afforded limited partnerships. To be taxed as a limited partnership, 90 percent or more of the PTP's gross income must come from the following sources:

  • interest,
  • dividends,
  • real property rents,
  • gain from the disposition of real property,
  • certain oil and gas, mineral, and natural resource income,
  • capital gain from the sale of assets used in the foregoing activities, and
  • income from certain commodities contracts.

What does this all mean? First, an investment in a PTP is inherently more tax-efficient than an investment in a corporation because the PTP's income is subject to only one level of tax – at the investor (partner) level. In contrast, the income of a publicly traded corporation is taxed twice – once at the corporate level and again at the shareholder level when dividends are issued.

In exchange for a single layer of tax, the reporting of, and tax planning for, PTPs is more complex. Until you sell your stock in a corporation, you only will recognize income when the corporation pays dividends. Usually these will be qualified dividends, taxed at a maximum rate of 20 percent beginning in 2013. In contrast, you will recognize income or loss on your share of the PTP's activity, regardless of the distributions paid, if any. Thus, the income on which you will pay taxes may be more or less than the cash distributions you actually receive. In addition, the majority of the PTP income likely will be taxed at ordinary rates, as high as 39.6 percent beginning in 2013. Both corporate dividends and PTP income will be subject to the 3.8 percent Medicare tax on net investment income, if applicable.

Generally, passive activity losses are only deductible in the current year to the extent of your passive income. Passive losses of one activity can offset the passive income of another. PTPs that are taxed as limited partnerships, however, are subject to special rules. The netting of passive income and losses is done separately for each PTP. Thus, a net passive loss from one PTP cannot offset income from another passive activity or for that matter any other PTP. Any suspended losses associated with a particular PTP are freed-up upon disposition of the ownership interest.

Finally, special reporting may be required on the sale of your PTP investment. Unlike a typical stock investment, your cost basis in a PTP is not solely attributable to what you originally paid for it. Rather, your cost basis is adjusted each year by the income or loss you recognize and by the distributions you receive. A few PTPs will track this information for you; but most do not. If the PTP you have invested in does not track this information, you or your tax advisor should.

Why is this necessary? Because the interest is a publicly traded security, you will typically hold it in your brokerage account. Most brokerage firms only know the initial purchase price of the security, not the income or loss allocated, nor the distributions paid, to you each year. Thus, they do not have the necessary information to maintain your cost basis. As a result, when you sell your position in a PTP, the basis reported by your brokerage firm probably will be incorrect. And with today's new basis reporting requirements by the brokerage firms, disclosures and adjustments may be necessary. This can become even more complicated if you trade back and forth in the investment, versus holding a certain position for a long period of time. All of this increased recordkeeping is also likely to increase the cost of preparing your income tax returns.

Investing in publicly traded partnerships may be a great investment strategy for your portfolio. Just be aware of and monitor your tax reporting requirements for these unique investments. For more information on the taxation of PTPs, and the related record-keeping requirements, contact your local CBIZ MHM tax advisor.


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Investing in Publicly Traded Partnerships? Know Your Record Keeping Responsibilities! (article)Investors looking for cash flow are often introduced to publicly-traded limited partnerships ("PTPs") as an addition to their investment portfolio. If you are contemplating such an investment, make certain you consider the additional tax recordkeeping requirements of PTPs....2013-04-27T12:48:00-05:00Investors looking for cash flow are often introduced to publicly-traded limited partnerships ("PTPs") as an addition to their investment portfolio. If you are contemplating such an investment, make certain you consider the additional tax recordkeeping requirements of PTPs.