K-1 Forms and Cost-Basis Calculations

Limited partnership companies are often involved in energy infrastructure.

Kim Steele/Photodisc/Getty Images

You can invest in units of publicly traded limited partnerships -- often called master limited partnerships, or MLPs -- using a brokerage account just as you would to buy shares of a corporation. The differences between MLP investments and stock shares show up at tax time. The K-1 form sent out by an MLP requires you to make some calculations before completing your tax return. The K-1 doesn't always give the information you need to report the cost basis for MLP investment sales.

Partnership Distributions vs. Income Reporting

Relatively high distribution yields are a major attraction of MLPs as investments. However, the dividends or distributions paid by an MLP are not taxable income. Technically, the distributions paid to investors are a return of the invested capital. The K-1 form shows the portion of the partnership earnings that an investor must claim as income on his tax return. Because many limited partnership companies can claim bookkeeping depreciation of assets against any income, the actual taxable income for an MLP investor is often much lower than the distributions earned on the shares or units owned.

Cost Basis Calculation

When MLP units are sold, a profit or loss is calculated using an adjusted basis for the units. Cost basis starts with the amount you paid to buy the MLP units. Reduce the initial cost basis by the distributions received during the period of ownership. Your partnership share of taxable income reported each year on the K-1 is added to the cost basis. Finally, the deductions reported on the K-1 and claimed on your tax return reduce the tax basis. In other words, the cost basis of an MLP investment will be the initial cost plus reported income minus reported deductions minus distributions received.

Maintain Current Records

As an investor in one or more MLP companies, you will receive a K-1 form from each of your MLP investments every year. The arrival of a K-1 is a good time to update your cost basis in that particular limited partnership investment. Your share of the income and deductions for the year can be pulled from the K-1 and applied to the running cost basis you are keeping for your investments. The amount of distributions you received for the year can be retrieved from your brokerage account summary.

Final K-1 May Provide Help

An MLP company tracks the information needed for the basis calculation for every investor who owns units in the company. Some MLPs will include a cost basis summary with the K-1, especially if an investor sold units during the year. The company isn't required by regulators to provide this information, so a limited partnership investor should be prepared to calculate his own cost basis. Receiving the numbers from the MLP, however, will make tax reporting a little easier.