A publicly traded partnership (PTP) is a business organized as a partnership – which is a pass-through
\nentity – traded as a stock on an exchange. Also referred to as Master Limited Partnerships (MLP) – the
\nconcepts are the same. The purpose is to combine the tax benefits of a partnership with the liquidity of
\na publicly traded security.<\/p>\n
A pass-through entity is an organization that does not pay income tax directly but rather passes through
\nany income (or loss) to be taxed on the individual tax returns of the owners of the organization. There
\nare different types of pass-through entities. The most common of which are partnerships and Scorporations. Limited Liability Companies or LLCs are technically non-existent under the tax code. Their
\ndefault treatment for tax purposes is as a partnership. However, LLCs may elect to be treated as
\ncorporations for tax purposes.<\/p>\n
The first PTP was created in 1981 when corporate income tax rates were greater than individual income
\ntax rates. The obvious purpose was to avoid the high tax on corporate earnings by passing-through the
\nincome to the individual owners of the partnership.<\/p>\n
Initially, all types of industries, restaurants, hotels, real estate, oil and gas, and even amusement parks
\ntook advantage of this structure. In 1987 Congress limited the types of businesses that could be
\norganized in this way, limiting it to organizations which earn at least 90% of gross income from
\ntransportation, processing, storage and production of natural resources and minerals.<\/p>\n
Like many partnerships, MLP\/PTPs have two classes of ownership; the general partners – who are the
\n“management” and make the operating decisions, and limited partners who provide funding and receive
\nprofits (and losses), but do not have decision making authority.<\/p>\n
MLP\/PTPs make quarterly payments to the owners. Because they are publicly traded, they are often
\nthought of as dividends, but for tax purposes they are more aligned with return of capital payments.
\nWhen an interest in an MLP\/PTP is purchased, it is as if the investor contributed to the equity of the
\norganization. Income is earned and taxed on the investor’s income tax return with the net income
\nadding to the equity investment in the PTP\/MLP. When a distribution is made, the equity in the
\ninvestment is reduced by the amount of the distribution.<\/p>\n
Since distributions from the PTP\/MLP are NOT dividends they are not reported (except as other non-tax
\ndistributions) on your annual 1099Div. All income (loss) is reported to each owner on form K-1 annually.
\nThis reporting comes directly from the partnership and is not available to brokers for individual
\naccounts. The income shown on the K-1 is reportable on your individual income tax returns and may be
\nmore or less than the distributions you receive.<\/p>\n
The K-1 income (loss) recognized on your return and the distributions you receive adjust the basis of the
\nPTP when it is sold. PTP\/MLPs are not covered securities, meaning that the cost basis is not reported to
\nthe IRS on the 1099B. It is the taxpayers’ responsibility to track this over the ownership of the security.
\nTax lot rules and the holding period rules apply.<\/p>\n
Beginning in 2018 a new deduction was implemented to encourage small businesses and attempt to
\nequalize the now higher personal income tax rates with lower corporate rates.<\/p>\n
Section 199A – the Qualified Business Income Deduction is used to reduce taxable income from
\noperating partnerships and other entities subject to certain income limitations. For PTP\/MLPs, and all
\nother pass-through entities filing a tax return, this information is now part of the K-1 reporting.<\/p>\n","protected":false},"excerpt":{"rendered":"
The main topics of this lesson are: Publicly Traded Partnerships; Pass – through Entity; Taxation Distributions; Reporting \u2013 the K-1; Cost Basis for Calculating Gain or Loss on Sale; and Section 199A – Qualified Business Income Deduction. For this lesson refer to the Study Notes and watch the video for a synopsis.<\/p>\n","protected":false},"author":929,"featured_media":221453,"parent":0,"comment_status":"open","ping_status":"open","template":"","meta":{"_acf_changed":false,"footnotes":""},"contributors-categories":[13576],"traders-academy":[13125,13128,13132],"class_list":{"0":"post-175797","1":"trading-lessons","2":"type-trading-lessons","3":"status-publish","4":"has-post-thumbnail","6":"contributors-categories-interactive-brokers","7":"traders-academy-beginner-trading","8":"traders-academy-level","9":"traders-academy-trading-lesson"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\n