Investors' Frequently Asked Questions

What are PTPs?

Publicly traded partnerships (PTPs) are what their name implies:  limited partnerships the interests in which, known as "units," are traded on public securities exchanges much like corporate stock.  Buying PTP units makes you a limited partner in that PTP.   Sometimes a PTP is technically not a partnership but a publicly traded limited liability company (LLC) which has chosen partnership taxation.   There are some differences between the two, but for tax purposes they are the same.

Are they the same thing as MLPs?

Yes, PTPs are more commonly known as "master limited partnerships," or MLPs. The term "publicly traded partnership" more accurately describes the most important difference between PTPs and other limited partnerships, i.e., the public trading of their units, which makes them a liquid investment.  

What kinds of companies operate as PTPs?  

Due to the requirements of the tax code, PTPs are predominantly in energy-related businesse. There are also PTPs in real estate, timber, and a few other businesses. For more specific information on the regulation of PTPs, please see the Laws & Regulations section of the website.

How are PTP units different from corporate stock?

In some ways, they are very similar.  They may be bought and sold on the New York, American, NASDAQ, and other public exchanges, and most of them pay a regular quarterly cash distribution.  The big difference is that because  PTPs are not corporations, they do not pay a corporate tax.  Instead, all tax items pass through to the partners.  This leaves more of the PTP's earnings free to pass on to you.  Moreover, for most of the time you hold your PTP units, you will not have to pay tax on the distributions the way you do on corporate dividends.  They are considered a tax-deferred "return of capital"-- that is, payback on your investment.  They reduce the basis of your partnership units but are not taxed as current income.

On the other hand, you will be responsible for paying tax on your share of the partnership’s taxable income.  However, most PTPs pay cash distributions that are well in excess of any tax owed.

If distributions are tax-deferred, is a PTP investment is tax-free until I sell it?

Not quite.  As a limited partner, you will be allocated your proportionate share of the PTP's income and capital gain and will be responsible for paying tax on it.  However, you will also be allocated a proportionate share of the PTP's deductions (such as depreciation), losses and credits.  These will offset much, and in some cases all, of the income.   All of these are allocated to you only on paper and are completely separate from the cash distribution. 

So what does it mean when someone says that a  PTP's distributions are, for example, "only 20% taxable?"

This is a shorthand and very inaccurate way of telling you that your paper share of the PTP's net taxable income will be equal to about 20% of your cash distributions.   It does not mean that any portion of your distributions will be currently taxable.

What if the income and deductions from the PTP come out to a net loss?

A net loss from a PTP is considered a "passive loss" under the tax code.  If you come out with a net loss for the tax year, you cannot deduct it from your taxable income.   However, you can carry it forward into future tax years and use it to reduce your taxable income from the same PTP.   And if any of the loss is left over when you sell your PTP, you can deduct it from your other income in that year.

Can I use the income I'm allocated by a PTP to soak up some of my passive losses from other investments?

No.  Passive income from a PTP may only be offset by passive losses from the same PTP, and passive losses from the PTP may not be offset against passive income from another investment.  However, if the result of netting a PTP's passive income and loss is net income, it is then considered portfolio income, and other investment expenses may be deducted from it.

When do distributions become taxable?

You could pay tax on your distributions:

·       If your adjusted basis in the units reaches zero.  Your original basis is the price you paid for the units.  It is adjusted downwards with each distribution and each allocation of deductions, and upwards with each allocation of income (don't worry about keeping track of all this--the PTP will do it for you).

·       If you sell your units at a gain.  Because the distributions have decreased your basis, they have increased the amount of taxable gain (which equals your sales price minus basis) on the sale. Some of your gain will be taxed at the lower capital gains rate, but the portion of the gain that results from deductions such as depreciation lowering your basis downwards will be taxed as ordinary income.

Do PTP units have a basis step-up at death like corporate stock?

Yes.  The basis of PTP units received by inheritance will be the market value of the units on the date of death. 

What do I do about my PTP investment at tax time?

Because you own a share of all the PTP's income and loss items, accounting for your PTP investment on your tax form is a bit more complex than accounting for corporate stock, but it's not as bad as many people fear.  When the income tax filing season arrives, you will receive a schedule K-1 from the partnership.  The K-1 will tell you your share of every kind of income and loss the PTP has.  But the people who send you the K-1 won't just give you a bunch of numbers and expect you to know what to do with them.  They will give you a complete package that will show you where everything goes on your tax return.  In addition, for most PTPs an investor relations staff is just a phone call away if there is anything in the K-1 package that you don't understand.

Additional information can be found in the following two IRS publications by clicking on the links below:

Publication 541:  Partnerships, rev. 2006

Partner's Instructions for Schedule K-1 (Form 1065) for 2007

Can I hold PTP units in my IRA? 

Yes, but you should keep in mind some important limitations.  Partnership income allocated to a tax-exempt organization or a trust like an IRA may be considered unrelated business taxable income (UBTI) subject to the unrelated business income tax (UBIT).  However, it will not be taxed as long as this income (minus the deductible costs of earning the income) plus all other income subject to UBIT does not exceed $1,000 in any year.   Note that it is the IRA's share of  the partnership's income and not the cash distributions it receives that is subject to UBIT.  You may decide that the PTP distributions are high enough that they still provide a favorable return on an after-tax basis. 

If my IRA's PTP investment does generate UBTI exceeding $1,000 do I have to pay the tax? 

You do not pay any tax yourself:  the IRA is the unitholder and therefore is the taxpayer.  The custodian of the IRA will be responsible for filing an IRS Form 990T.   The IRA's share of all PTP income and of the deductions connected with the production of that income (as well as the income and deduction from any other partnership investments) is netted and entered on line 5, "Income (loss) from partnerships and S corporations."   The "specific deduction" of  $1,000 is entered on line 33.  The deduction is subtracted from the amount on line 5, and tax is paid (out of the IRA funds) on the result, at the corporate tax rate.   A statement showing the IRA's share of the partnership's gross income, and of the partnership deductions directly connected with producing the income, should be attached to the return.

Can I invest in PTPs through a mutual fund?

You can, but your choices may be limited, particularly for conventional mutual funds operating as Regulated Investment Companies (RICs) under the tax code.  The American Jobs Creation Act of  2004 made it easier for mutual funds to invest in PTPs by adding them to the list of qualifying sources of income for RICs under the tax code, as long as PTPs do not constitute more than 25% of the RIC's assets.  However, not many mutual funds have availed themselves of this opportunity, primarily because of concerns about timing issues in reporting taxable income. 

However, there are several closed-end funds and hedge funds which are not subject to the RIC rules and invest more freely in PTPs.    Several of these funds can be found in the "non-PTP" section of the NAPTP membership list.

How does PTP taxation work if I invest through a mutual fund?

The mutual fund will own the partnership units and becomes the limited partner.  Like any partner, it is allocated a share of the PTP's income, is responsible for paying any owed on that income, and receives cash distributions.  As an investor in the mutual fund, you will receive your share of the PTP income in the form of a dividend paid to you by the mutual fund.    Note that for tax-exempt investors, this solves the UBIT problem, as dividends are not subject to UBIT.

Is it true that I have to pay tax in states in states where the PTP has operations?

As a partner in a PTP (or any other partnership), you are considered to be "earning" taxable income in any state where the PTP is earning income and are responsible for any state tax owed on that income.   However, unless you hold a very large position in the PTP, there is a good chance that you will not owe tax and may not have to file.   Once a PTP's net income is divided up among all the states in which it operates, and then is further divided among tens of thousands of investors, the amount of income allocable to any one investor for any one state will be very small.   To assist you in determining whether you may have state tax obligations related to a particular PTP, this website provides a table showing the states in which each PTP operates and a link to information on each state's tax and filing thresholds.