My capital account on my K-1 reflects the following:
12/31/10 Beg. balance $1,000 Capital contributed 0 Current yr. increase (decrease) ($237) Distributions ($2,290)
12/31/11 Ending Capital Balance ($1,527)
Since my capital account has a negative balance, is any portion of this now taxable? If so, is it taxed as ordinary income or capital gains?
Finally, I've been using Turbo Tax for all of the years that I've owned KMP. If I enter all of the amounts from my K-1, will Turbo Tax automatically make the correct entry or will I have to make a manual entry?
"I don't think I made my question clear. Partnership basis is reduced by losses as well as distributions. Suppose a partnership had nothing but losses thus reducing the basis to zero. Then it paid a first ever distribution which would push the basis below zero. In that case would one still be taxed on the distribution? If so wouldn't that be unfair?"
Why a first ever distribution? MLPs pay distributions every quarter. Distributions are not paid out of earnings but of dcf. So even if the partnership is recording gaap losses, you are still collecting distributions. The implication of the losses is just that you are not paying any taxes on those distributions you are receiving. By the time you get to zero basis you have likely been collecting distributions for years and not paid any taxes on them.
I will leave the second half of your post for someone else, as this is a murky area. There have been posts on Investor Village to the effect that even after you reach zero basis you may still not be liable yet to pay distributions in excess of basis if you have non-recourse liabilities and/or deferred passive losses.