October 25, 2010

The Hidden Pitfalls of PTPs

By Andrew Clark, Senior Manager, Tax & Business

Related Service Tax & Business

The Hidden Pitfalls of PTPs Tax & Business

Over the last several years, an investment vehicle commonly referred to as publically traded partnerships (PTPs) has become an increasingly popular way for investors to diversify their portfolios and provide new opportunities for people to make money.

Simply put, PTPs are publically traded shares of partnership interests for funds that invest in underlying hard assets (such as natural gas or oil.) PTP shares can be easily purchased through a brokerage account like other stocks and bonds, but the major difference between PTPs and regular equities is that each year investors receive a Federal Form K-1 which reflects income and losses attributable to the investment for the tax year. This income is required to be reported on the investor’s income tax return along with other earnings and deductions accumulated during the course of a year.

The earnings and expenses in addition to capital contributions or withdrawals made during the year affect cost basis in the PTP. Most brokerage accounts do not adjust cost basis for these items annually – preferring to reflect securities at historical cost. Having an accurate cost basis is extremely important when contemplating a sale of PTP shares.

There are two potential solutions in order to solve the cost basis problem and ensure an accurate calculation of basis upon disposition of the PTP asset:

  • Responsibility of tracking basis in each PTP owned, updating annually for items affecting basis listed above.
  • Use the cumulative basis adjustment number provided with the final K-1. This amount is the summation of all your income, expenses, contributions, and withdrawals made during the time the asset was owned. The historical cost basis should be adjusted by the cumulative basis adjustment provided.

Either of these two methods will provide the investor with the correct basis to utilize for gain or loss computation on Schedule D.

One final note, some brokerage accounts may not include the disposition of the PTP on Form 1099B. If that is the case, the distribution must still be included on Schedule D. Gross proceeds from the sale of the PTP would be the funds received.