Almost bought a few hundred shares of LINE but didn't pull the trigger. Now I read that there are some reporting requirements at year end.? What is the k-1 and how does it come into play here. Sorry for the naivity.
I think that the $1000 limit each year applies to Roths also. But, I have been reading threads like this one for many years and the messages always say UBTI is very low or negative. The date you buy your stock is important. Last year my wife had $750 of UBTI on 600 units of OKS, while I had $417 of UBTI on 500 units of OKS. Her's was purchased from 1996 to 2000, while mine were all purchased in 2000. So she had $1.25 UBTI per unit while I had $.83 per unit, because she had owned hers longer. In 2000 she had negative $391 UBTI on 400 units, in 2002 she had negative $505 UBTI on 400 units, negative $291 on 600 units in 2004, and in 2005 it turned positive, $36 on 600 units. Most of these were not the same as ordinary income on the K1's, so make sure you are reading UBTI. We both switched to other Partnerships this year, and may get back in OKS next year, with our eligibility reestablished for deductions used when the Partnership is figuring UBTI.
what about roths? that is what we have. i really want to think you guys for your time and your wisdom. i have been on boards reading trying to decide whether or not to put this in my roth. i have this in my trust account. there is so much to know sometimes it gets confusing. thanks for straightening me out. its really appreciated. now which ones to buy.
DMLP has been excellent for me. One way to find out about UBTI is to get on the message board and ask current stockholders what they are seeing on their K1's. I don't bother. I just buy Partnerships that seem to be a bargain, and wait for the K1. No problem so far. I recently sold OKS because I had a lot of it for a long time and UBTI was becoming a big number. Your UBTI is reduced by certain expenses, but those deductions are used up over the years. I'll probably get back into OKS next year, with all the deductions reestablished.
Borrowing doesn't have much to do with UBTI which is just another name for the net operating income of the partnership. If you check a typical K1, you'll see Box 1 (Earnings) and Box 20V (UBTI) are almost always identical. CEFs report on a 1099 so not an issue but you don't always get the same tax deferral on distributions and the mgmt fees can be high. On the other hand. in a CEF, all your gain is Cap Gain. In a a typical MLP, when tax time comes around (when you sell), a lot of your deferred distributions get taxed as ordinary income because of recapture of depreciation and other items. Of course, we're talking about taxable accounts; in a retirement acct, its all ordinary income (except for Roths)
KMR gets around the whole issue (if you don't mind owning KMP at a discount.)
Otherwise, there's DMLP (which doesn't ever generate UBTI as it doesn't borrow) or a slew of closed-end funds.
Agree re hard to predict. That is why homework is needed on the individual MLPs. Some posters go ballistic when they hear about taxes in IRAs because of UBTI. It can be a problem, but not a reason to avoid MLPs in IRAs. Just do a bit of homework before you buy.
The unfortunate part of UBTI is it seems totally unpredictable. Now some MLPS (EPD, KMP) seem to generate large negative amounts every year. But the E&Ps seem different. I owned VNR last year but had a small portion and then made some large additions in the 4th qtr. The UBTI was about $1 per share so it wouldn't take a lot to get you over the $1000 mark. Supposedly, you can reduce UBTI by the amount of depletion and IDCs but I have yet to see documentation for that approach by a reliable source. Same with netting positive and negative UBTI across MLPs.
LINE split reporting last yr on 2 K1's. The period from 1/1 - 8/31 had significant UBTI; the period from 9/1 - 12/31 had smaller negative UBTI.
Its very difficult to get a handle on this.
In a taxable account it doesn't take long for your K1. Turbotax handles it.
In an IRA there is no paperwork except in the unlikely event that UBTI exceeds $1,000 in a year. If that happens, the broker does the paperwork and takes tax money out of your account. I don't know what they charge. I've held many thousands of dollars worth of partnerships in IRAs and never paid any tax. But keep an eye on those K1s over the years because UBTI can increase as you use up deductions. That could make you decide to switch to another partnership to reestablish your deductions.
Accoring to the CPA:
1. An investment in a partnership (or any pass-thru entity) has no tax consequences to a tax-deferred account, such as an IRA.
2. A K-1 is not filed with any taxpayer's tax return.
So far as I am concerned it is much to do about nothing.
If you buy UNITS (not shares) of an MLP you become a limited partner in the company. That means a share of the profits are actually yours.
There is an IRS rule that in an IRA you are only allowed to have $1000 of UBTI (unrelated business taxable income). At the end of the tax year, the MLP issues a K1 report to you and the IRS. On the K1 is a line called UBTI and if the amount on that line is more than $1000 you will have to pay some taxes on the UBTI.
Usually the amount is very small or even negative. Most people will not be effected by the UBTI tax issue.
I have a VERY large holding in Linn, in my IRA. This is the first year that I will receive a K1. I have no idea how big the UBTI will be. But I don't care even if I have to pay some taxes on it. Any amount of taxes I have to pay will probably will be insignificent compared to the large amount of gains I am getting on the stock.
If you want to buy Linn for your IRA, go ahead and just buy it.
I spoke to my CPA and he was not concerned about the tax consequences of the UBTI, and that is good enough for me.
I have no idea how an energy company could possibly have Unrelated Business Taxable Income (UBTI). I have been a tax partner in a major CPA firm for 30 yrs and have never seen it yet. The whole concept of UBTI refers to tax exempt entities, normally charitable institutions who engage in activities other than those for which the organization was intended. The prupose is to keep these organizations from competing with taxable entities at an unfair advantage.
So does the k-1 already figure your depreciation and deductions from the MLP income and send you the net income result. Also, if there are any taxes owed doesn't my IRA custodian take care of it.? Thanks and sorry for any redundancy here.