I pay quarterly taxes to both the fed's & state.
I pay taxes for "Dividends & Interest" earned on stock & cd's.
Limited Partnerships pay a "CASH DISTRIBUTION" quartrly (K1 form) not a 1099 form.
They are not considered a "Dividend".
My question is do I have to pay taxes on the "Cash Distribution"? on stocks that are LP's.
I realize that a tax must be paid if the above is "SOLD"
This is not a stock in a corporation. This is a partnership (L.P.) and while you're correct regarding a negative tax basis in a C Corporation entity there are different rules for a partnership (form 1065). Again my advice is to consult a CPA regarding this issue and not rely on this MB for tax information that is somewhat complicated.
Cash distributions impact your capital or equity balance within the partnership. Report only what is shown on form 1065 K-1. Your basis should also be used for cost basis if you liqidate all or part of your partnership interest.
Generally speaking, you are correct. Any difference between your original purchase price and your sale price is treated as a capital gain (or loss), and would be long term or short term depending on the holding period and reported on Schedule D as such. When you sell, the MLP will supply a sales schedule supplement to the K1 detailing the adjustments to basis and the ordinary gain which as I recall goes on Form 4797 and is taxed as ordinary income.
One thing for sure, there's not easy answer to the questions regarding taxability. The way I think of it is that distributions are a return of your investment. As a partner in a partnership, you have to report your share of the taxable income of the partnership, which due to depreciation, is generally quite a lot less than your distribution (as noted above, 10-20%, although all partnerships are different regarding what is referred to as the tax shield).
Distributions decrease your basis, income increases your basis. When you sell, the amount of depreciation attributed to you over the years is recaptured at ordinary income rates. I think the remainder is capital gains rate if you've held for a year. In general, this is an oversimplification as well. I'm just happy that someone else tracks all of this and even though they are a pain, they provide it to you on a K-1.
Sorry to muddy the waters more.
When you sell the MLP do you pay at the long term capital gains rate(15%) or at regular income. For example if I have owned ETE for over 1 year, cost basis has been taken down to zero do I have to pay 15% or 35% on my entire gain? Also do states typically tax as capital gain or income. Thanks.