Dealing with Master Limited Partnerships (MLPs) can be one of the most complex aspects of tax season, especially when you sell your units. Unlike regular stocks, MLPs come with their own unique set of tax rules due to their pass-through entity structure, often involving Schedule K-1s, adjusted basis calculations, and the recapture of prior deductions. But don't worry, TurboTax is designed to help you navigate these complexities. This lengthy guide will walk you through the process step-by-step, ensuring you report your MLP sale accurately.
Navigating the Maze: Reporting Your MLP Sale in TurboTax
Ready to conquer your MLP sale reporting? Let's dive in! This guide assumes you have received your Form 1099-B from your broker and the crucial Schedule K-1 (Form 1065) with its accompanying supplemental statements from the MLP. Both are essential for accurate reporting.
Step 1: Gather Your Documents and Understand the Landscape
Before you even open TurboTax, let's make sure you have everything you need and understand why you need it. This is perhaps the most critical step in preventing errors and ensuring you don't overpay (or underpay!) your taxes.
Sub-heading: The Essential Documents
Form 1099-B (Proceeds From Broker and Barter Exchange Transactions): This form from your brokerage reports the gross proceeds from your sale and, sometimes, the original cost basis. However, for MLPs, the cost basis reported on your 1099-B is almost always incorrect for tax purposes. This is because your actual tax basis is adjusted by the MLP's distributions, income, and losses over the years.
Schedule K-1 (Form 1065) for the Year of Sale: This is issued by the MLP itself. It reports your share of the partnership's income, losses, deductions, and credits for the year. Look for the box that indicates "Final K-1" or a full disposition.
MLP Sales Schedule / Supplemental Information: This is the most important document when selling an MLP. It's usually attached to your final Schedule K-1 and provides the detailed calculations for your adjusted basis, ordinary gain (Section 751 gain), and sometimes even the capital gain/loss. Do NOT skip this document! If you haven't received it, contact the MLP's investor relations department immediately.
Prior Year K-1s (Optional but Recommended): While the sales schedule typically provides the necessary adjusted basis, having your prior year K-1s can be helpful for verification, especially if you have accumulated unallowed passive activity losses.
Sub-heading: Why MLPs Are Different (and Tricky!)
MLPs are "pass-through" entities, meaning they don't pay corporate income tax. Instead, their income, gains, losses, and deductions "pass through" to you, the individual investor. This means:
Adjusted Basis: Your cost basis in an MLP is constantly changing. It's increased by your share of the MLP's income and contributions, and decreased by distributions (often referred to as Return of Capital, or ROC) and losses. This is why the 1099-B basis is typically wrong.
Ordinary Income Recapture (Section 751 Gain): A significant portion of your gain from selling an MLP can be recharacterized as ordinary income (taxed at higher ordinary income tax rates) instead of capital gain. This happens because of depreciation deductions and other items that reduced your basis over the years. This amount is crucial and will be found on your MLP Sales Schedule (often referred to as Section 751 gain or unrecaptured Section 1250 gain).
Passive Activity Losses (PALs): If the MLP generated losses in prior years that you couldn't deduct (due to passive activity rules or basis limitations), selling your entire interest in the MLP generally allows you to release and deduct those accumulated passive activity losses. TurboTax will help you track and apply these.
Step 2: Entering Your Form 1099-B Information in TurboTax
Let's get started with the broker statement, knowing we'll adjust it later.
Open TurboTax and Navigate to Investment Income:
In TurboTax, go to the "Federal" tab (or "Federal Taxes").
Select "Wages & Income" (or "Income & Expenses").
Scroll down to the "Investments and Savings" section.
Look for "Stocks, Cryptocurrency, Mutual Funds, Bonds, Other" and click "Start" or "Revisit."
Choose Your Entry Method:
TurboTax will ask how you want to enter your 1099-B information.
If your broker is partnered with TurboTax, you might be able to import your 1099-B data directly. While convenient, be prepared to make manual adjustments later for MLPs.
Alternatively, you can choose to "Type it myself" or "Enter a different way." This gives you more control from the start.
Enter Sale Details from 1099-B:
Enter the name of the brokerage and the type of investment (stock, although it's an MLP, for the 1099-B entry).
Input the sales proceeds exactly as reported on your 1099-B.
Enter the date acquired and date sold.
For the cost basis, enter the amount reported on your 1099-B (Box 1e), even if you know it's incorrect.
Crucially, check the box that states, "The cost basis is incorrect or missing on my 1099-B." This is essential because it allows you to override the broker's reported basis with the correct tax basis from your MLP Sales Schedule later. TurboTax will typically categorize this as a "Noncovered Security" or indicate that the basis was not reported to the IRS (often code B or E).
Step 3: Entering Your Schedule K-1 (Form 1065)
This is where the MLP-specific magic happens.
Navigate to K-1 Entry:
Back in the "Wages & Income" section, scroll down to "S-corps, Partnerships, and Trusts."
Click "Start" or "Revisit" next to "Schedule K-1 (Form 1065) Partnership/LLC."
Add Your K-1:
Select "Add a K-1."
Choose "Partnership/LLC (Form 1065)."
Enter the name of the MLP and its EIN (Employer Identification Number) from your K-1.
Answer the questions about whether it's a publicly traded partnership (PTP) – you must answer "Yes" for an MLP.
Indicate your partner type (typically "Limited Partner").
Report the Sale of Your Interest:
TurboTax will ask if you disposed of a portion of your interest or if the partnership ended.
If you sold all your units, select "This partnership ended" and then "Complete disposition." This is crucial for releasing passive activity losses.
If you sold some but not all units, select "Disposed of a portion of my interest in the partnership."
This will lead you to a "Sale Information" screen within the K-1 interview. This is where you will reconcile the K-1 information with your 1099-B.
Sub-heading: Populating the K-1 Sale Information
This part is where you'll use your MLP Sales Schedule.
Sales Price: This should generally be the ordinary income (or "gain subject to recapture as ordinary income") from your MLP Sales Schedule (often in a column labeled "Column 7" or similar, or sometimes directly on Box 20, Code AB of your K-1). For the K-1's disposition section, you often enter this ordinary income as the "sales price" and a "zero" basis to ensure it flows to Form 4797.
Why this seemingly odd entry? The system is designed to correctly generate Form 4797 for the ordinary income portion of the sale. The capital gain/loss portion will be handled separately by adjusting the 1099-B entry.
Partnership Basis (for sale calculation): This is where it gets critical. Enter "0" (zero) in the basis field when entering the ordinary income as sales price. This is to prevent duplication and ensure the ordinary income flows correctly to Form 4797.
Ordinary Gain (Section 751 Gain): There will be a specific box for "Ordinary Gain" or "Section 751 Gain" (or similar wording) in the K-1 disposition section. Enter the amount from your MLP Sales Schedule that corresponds to this. This is the portion of your gain that will be taxed as ordinary income on Form 4797.
Unrecaptured Section 1250 Gain: If your MLP Sales Schedule shows an amount for unrecaptured Section 1250 gain, ensure it is entered in the appropriate place in the K-1 interview. This is typically capital gain but taxed at a maximum 25% rate.
Step 4: Reconciling with Your Form 1099-B and Correcting Basis
Now you need to make sure you're not double-counting income or loss, and that your capital gain/loss is calculated correctly.
Return to the 1099-B Entry:
Go back to the "Stocks, Cryptocurrency, Mutual Funds, Bonds, Other" section.
Locate the MLP sale you entered based on your 1099-B.
Adjust the Cost Basis:
Since you checked "The cost basis is incorrect or missing," you'll now have the opportunity to manually adjust the cost basis.
Your correct tax basis for capital gain/loss purposes is typically found on your MLP Sales Schedule (often a column labeled "Adjusted Basis," "Tax Basis," or "Column 6 Total Adjusted Cost Basis").
Enter this corrected adjusted basis in the appropriate field.
Important Consideration: If you entered the Section 751 ordinary gain as a "sales price" with a "zero" basis in the K-1 section, you will want to adjust your 1099-B's sale proceeds and basis so that the net capital gain or loss from the 1099-B entry becomes zero or reflects only the capital gain/loss portion after the ordinary income is accounted for. This is done to prevent double-counting.
A common approach: Some experts advise entering a sales price of zero and a basis of zero on the 1099-B entry if the entire gain/loss is effectively handled by the K-1 entries. However, this depends on how TurboTax processes the various MLP-specific forms.
Another common approach: Use the actual sales price from your 1099-B. For the basis, take your actual adjusted tax basis (from the MLP Sales Schedule) and add the Section 751 ordinary gain to it. This effectively reduces your capital gain (or increases your capital loss) by the amount already captured as ordinary income.
Example: Sales Price (1099-B) = $10,000. Adjusted Tax Basis (K-1 Schedule) = $8,000. Section 751 Ordinary Gain = $1,000.
In the K-1 section: Enter Sales Price = $1,000, Basis = $0 (to flow to 4797).
In the 1099-B section: Sales Price = $10,000. Adjusted Basis = $8,000 + $1,000 = $9,000. This results in a capital gain of $1,000 ($10,000 - $9,000). The total gain is $1,000 (ordinary) + $1,000 (capital) = $2,000, which matches your overall economic gain.
Step 5: Addressing Passive Activity Losses (PALs)
If you have unallowed passive activity losses from prior years related to this MLP, selling your entire interest should trigger their release.
TurboTax's Automatic Calculation:
When you mark the K-1 as a "complete disposition" in Step 3, TurboTax is usually smart enough to automatically calculate and release any suspended passive activity losses associated with that specific MLP. These losses will then offset other income on your return.
Review Form 8582 (Passive Activity Loss Limitations):
After completing the K-1 and 1099-B entries, it's a very good idea to go into Forms Mode (if using the desktop version) or review the generated forms in TurboTax Online.
Look for Form 8582. You should see the previously suspended losses from this MLP being offset. If you're unsure, you can check the "Tools" section in TurboTax to see if you have any unallowed passive activity losses carryforwards from prior years, and confirm they are being utilized.
Step 6: Reviewing Generated Forms
After entering all the information, take a moment to review the forms TurboTax has generated. This is your chance to catch any potential errors.
Form 8949 (Sales and Other Dispositions of Capital Assets): This form reports your capital gains and losses. Ensure the sales price and adjusted basis reflect your intent from Step 4. You should see entries with the correct code indicating the basis was not reported to the IRS or was adjusted.
Schedule D (Capital Gains and Losses): This summarizes your capital gains and losses from Form 8949.
Form 4797 (Sales of Business Property): This form is critical for MLPs as it reports the ordinary income recapture (Section 751 gain). You should see the ordinary gain from your MLP sale listed here.
Schedule E (Supplemental Income and Loss): This schedule reports income or losses from partnerships. You'll see the current year's K-1 income/loss here, and if you had prior year suspended losses, you'll see them being utilized.
Frequently Asked Questions (FAQs) - How to Report MLP Sales in TurboTax
Here are 10 common questions and quick answers related to reporting MLP sales in TurboTax:
How to get my MLP Sales Schedule?
Your MLP Sales Schedule is usually included in the comprehensive tax package you receive from the MLP, often with your final Schedule K-1. If you don't have it, contact the MLP's investor relations department or their transfer agent.
How to handle a negative cost basis on my 1099-B for an MLP?
A negative cost basis on your 1099-B for an MLP is common. When entering it in TurboTax, you will likely need to indicate that the cost basis is incorrect or missing. The true adjusted tax basis will come from your MLP Sales Schedule, which might be very low or even negative for tax purposes. TurboTax will guide you on how to correctly report this, often by adjusting the basis on the 8949.
How to report a partial sale of an MLP in TurboTax?
If you sold only a portion of your MLP units, when entering the K-1 information in TurboTax, you will select "Disposed of a portion of my interest in the partnership." You'll then enter the pro-rata portion of the ordinary gain and adjusted basis from your MLP Sales Schedule corresponding to the units sold.
How to calculate the adjusted basis for an MLP sale?
The adjusted basis for your MLP units is calculated by starting with your original purchase price and then adjusting it for all subsequent income, losses, and distributions (especially return of capital) reported on all your prior and current year K-1s. Fortunately, your MLP Sales Schedule should provide this calculated adjusted basis for you.
How to handle suspended passive activity losses from an MLP?
When you sell your entire interest in an MLP, any previously unallowed (suspended) passive activity losses from that specific MLP are generally released and become deductible. TurboTax will typically recognize a "complete disposition" from the K-1 entry and automatically allow these losses to offset other income on your return.
How to avoid double-counting MLP sale income in TurboTax?
To avoid double-counting, you need to coordinate the 1099-B entry with the K-1 disposition entry. A common strategy is to adjust the cost basis on the 1099-B entry to account for the ordinary income already reported via the K-1, or in some cases, to zero out the 1099-B transaction and rely solely on the K-1's disposition reporting if TurboTax allows this for your specific situation. Always review Form 8949 and Form 4797 to ensure accurate reporting.
How to find the Section 751 gain on my K-1 or supplemental statement?
The Section 751 gain (also known as ordinary income recapture or unrecaptured Section 1250 gain) is crucial. It is typically found on the supplemental sales schedule provided by the MLP, often in a column labeled "Gain subject to recapture as ordinary income" or similar. It may also be reported in Box 20, Code AB on your K-1.
How to enter an MLP sale if I didn't receive a 1099-B?
While rare for publicly traded MLPs, if you did not receive a 1099-B, you would still enter the sale information directly into TurboTax's investment section, ensuring you select that the broker did not report the sale to the IRS. You would then use your MLP Sales Schedule to determine the correct sales proceeds, adjusted basis, and ordinary gain.
How to account for state tax implications of MLP sales?
State tax rules for MLPs can vary. Some states may follow federal treatment, while others have their own specific rules for pass-through entities and income sourcing. TurboTax will generally guide you through state-specific adjustments once you've accurately entered all federal MLP information. Review your state tax forms carefully.
How to deal with MLP sales if TurboTax doesn't seem to calculate correctly?
If you suspect TurboTax isn't calculating your MLP sale correctly, first, double-check all your entries against your K-1 and MLP Sales Schedule. Ensure you've correctly identified the ordinary gain, adjusted basis, and marked the disposition. If issues persist, consider using TurboTax's "Forms Mode" to review the underlying forms (8949, 4797, Schedule D, Schedule E) directly, or consult a qualified tax professional.
