K-1 (1065) Basics: PTP
Pass-Through-Partnerships
Part One
If you’ve followed our weekly stock picks, then by now you’ve received one (or more) of these forms. Maybe you went to Yahoo! and typed in “K-1” and now you’re wondering what the difference is between 1065, 1041, and 1120-S.
Maybe you even read the instruction booklet, and maybe you tried to deduce how to use these yourself. Maybe you just gave up and just plain reported your brokerage statement as normal. Or perhaps you just pretended this things didn’t exist.
Whatever the case may be, just remember, Rockydennis Presents takes absolutely no responsibility whatsoever for your actions!
If you’re getting K-1’s because of us, then you’re getting 1065 and you’re going to see that Box D is checked.
Ladies and gentlemen, we are dealing with PTP’s. This changes the rules for how we deal with our K-1’s.
Spoiler Alert : This is way easier.
Double Spoiler Alert : Most PTP’s track and report your basis for you, so you don’t have to do hard stuff later.
That being said, we need to make sure we record our basis. We’ll get back to that, but the first step is to write this down.
Step 1. Get a journal and pen.
Step 2 : Write Down Your Basis
How do you determine your basis? The technical way is dumb and not necessary. The easy way is to take your first year K-1 (IT HAS TO BE THE FIRST YEAR) and write down your amount of capital contributed that year.
Our original basis in these units (PTP shares are called ‘units’) is $97.
“But Rocky!” you say, “Ending Capital account says $89!”.
That doesn’t necessarily mean our basis is $89 at the end of the year. It might be, it might not be. We need to determine our basis at the end of this year before moving on to the next year.
There is a worksheet inside your K-1 instruction book that will help you determine your basis. This is the right way to do it.
The easy way is to just subtract any distributions you receive from your basis, and add in any money you contribute (by buying more shares in your Robinhood app).
So we contributed $97 and received $44 in contributions. Our basis is $37.
Our ending capital account might be different, and next year’s beginning capital account almost certainly will be different. That’s why we don’t generally refer to capital account for determining basis.
Why do I care about basis?
For when you sell your units (shares), and for knowing when to pay tax on your distributions.
For sales of units, you’ll generally receive the adjusted basis statement from the partnership, and it will be relatively easy to make the proper adjustments on your tax return.
For distributions after your basis drops to $0, you’ll need to report this as capital gains.
So for our pretend example, if nothing else changes and we get $44 in distributions again next year, we’ll have $7 of long-term capital gain to report.
(Just so we’re clear, this isn’t the “correct” way to go about it, but will suffice and produce reasonably accurate results for most of us. When you get to the point of working with larger numbers where negligible discrepancies become substantial differences, it’s probably time to invest in software or a paid professional).
What does this mean? You may notice that income/loss affects your capital account. Yes, yes it does.
It also affects your gains and losses that need to be reported on your tax return. In 2021, we had $0 to report as a gain. We carry-forward the ($44) to the next year.
PTP losses can only be taken against gains from the same PTP. Losses carry forward indefinitely. Also write this down. Nobody keeps track of your carry-forward losses for you.
(The IRS does, but not for you. And they don’t automatically apply them.)
So you can see in 2022, we had a $2 gain. We would report this as Ordinary Income. Yes, even though it is passive income, we actually report it as non-passive income. This is taxed at our marginal rate. ….
…. wait, what?
Yes, those returns of capital may be tax-free, but your gain in the partnership is not. But before you pony up $0.24 for the Big Guy, let’s apply our losses from last year! BOOM! We now have $0 of gain for this year, and ($42) of loss carries forward to next year!
Easy peezy! Box 1 is DONE. Boxes 2 and 3 are treated the same. (Unless you’re a real estate professional and materially participating the activity. If you aren’t sure what that means, then the answer is ‘no’.)
All the same!
For us, for our purposes, these are all the same. If you work for this company, and there’s real estate rental income, and you’re materially participating….WHY ARE YOU HERE?! Jk , welcome, glad to have you. Share your knowledge in the comments below!
What about Box 4a and 4b? Report those on Schedule E , Line 28, column k. Obviously. What are you, retarded or something?
4c is just 4a+4b. You and I, me and you, we have no reason to care about what the payments are for. Just use 4c.
Notice how the lines are so long that they’re broken into two parts, despite actually being the same line!
Interest and dividends go right to your 1040, no fuss no muss. Line 6c is only for people who are not US persons and domestic partnerships. We’re American, line 6c isn’t for us.
Oh snap! Where do royalties go? Can you guess?
If you said Schedule D, you’d be a goddamn idiot. You might as well just move to Canada and enroll in MAID because you’re only ruining life for everybody else. Jesus Christ, your parents must be so disappointed.
SCHEDULE E, YOU DAFT CUNT. Line 4.
