Experience with MLP in taxable account?

[LarryMelman]

I have a taxable portfolio of common (dividend growth) and preferred stocks that should amply fund retirement when I finally get around to it. Since I'm still working, my investments have a noticeable tax drag but that's OK.

I could continue investing my idle cash in my existing positions but that just increases the tax drag. I'm thinking about dabbling in high-quality MLP's such as EPD. I know the theory of how they are taxed but I would like some examples of how that works in practice.

So if you own EPD or similar in a taxable account, and do your own taxes, I would like to hear about your experience.

(I searched both EPD and MLP here and did not find anything.)

 

[djsander]

I worked for an MLP and part of my bonus structure was MLP unit grants. They are a tax headache. You have to wait for the K1 which arrives on or after March 15th. I use TurboTax and it wasn’t too bad entering the info. Initially there was no effect on taxes. I sold a few years later and that’s when the complications began. You get a sales sheet and you have ordinary gains, long term and short term gains and you do have to figure some of it out. Each cash distribution you received decreases your original cost basis which is shown own the sales sheet. TurboTax doesn’t do a good job on them. Next if you exceed an income threshold in any states they operate in you have to file a tax return for the state where that occurs. Another aspect is if the mlp holds MLPs then you may have to have multiple K1. This is all a very high level explanation and gets rather complicated. I learned after my first sell to sale all my units as they vested. They are suppose to be long term holds to defer taxes, however they may eventually get to a zero cost basis and you pay some taxes on them every year. Also, look what happened to the long term holders in Kinder Morgan they converted to a c corp and a lot of taxes became due. Good luck, but to me they just weren’t worth the hassle.

 

[ownyourfuture]

Also, look what happened to the long term holders in Kinder Morgan they converted to a c corp and a lot of taxes became due.

I was one of those

 

[LarryMelman]

I worked for an MLP and part of my bonus structure was MLP unit grants. They are a tax headache. You have to wait for the K1 which arrives on or after March 15th. I use TurboTax and it wasn’t too bad entering the info. Initially there was no effect on taxes. I sold a few years later and that’s when the complications began. You get a sales sheet and you have ordinary gains, long term and short term gains and you do have to figure some of it out. Each cash distribution you received decreases your original cost basis which is shown own the sales sheet. TurboTax doesn’t do a good job on them. Next if you exceed an income threshold in any states they operate in you have to file a tax return for the state where that occurs. Another aspect is if the mlp holds MLPs then you may have to have multiple K1. This is all a very high level explanation and gets rather complicated. I learned after my first sell to sale all my units as they vested. They are suppose to be long term holds to defer taxes, however they may eventually get to a zero cost basis and you pay some taxes on them every year. Also, look what happened to the long term holders in Kinder Morgan they converted to a c corp and a lot of taxes became due. Good luck, but to me they just weren’t worth the hassle.

Thanks for the reply. I was hoping more would respond. But you've hit on all the points I knew about at a high level, which are:
1. Distributions are ROC until your basis is reduced to 0, then they are taxable.
2. K1's and the possibility of filing state tax returns in various states.
3. TurboTax handles the distribution side of K1's if you know how to drive it. Which I'm pretty good at, but I also work the numbers myself as a sanity check.

I wouldn't ever plan to sell but who knows.

 

[Sue J]

One of my son’s first investments years ago was EPD. I think he heard about it on Jim Cramer’s show. It did very well for him early on but everything is down this year.

He does his own taxes and for EPD he had to learn about K-1s. That’s the only not-so-simple thing on his taxes.

 

[Surewhitey]

We finally sold ours as it was a real headache for me while filing ours. I'll never do it again personally. Don't even know if I did exactly what I should have... Not gonna worry about it anymore though.

 

[djsander]

Thanks for the reply. I was hoping more would respond. But you've hit on all the points I knew about at a high level, which are:
1. Distributions are ROC until your basis is reduced to 0, then they are taxable.
2. K1's and the possibility of filing state tax returns in various states.
3. TurboTax handles the distribution side of K1's if you know how to drive it. Which I'm pretty good at, but I also work the numbers myself as a sanity check.

I wouldn't ever plan to sell but who knows.

Turbo tax will also track the passive losses and income in the MLP so it calculates the changes. I believe I have that info correct. There is a user named nexchap in the intuit site that has pretty detailed explanations on how to handle any sales. Good luck!

 

[Winemaker]

I have not owned EDP, but other MLPs in taxable account. I have not had any issue with them with Turbo Tax, but sometimes, I've heard that some K-1s come after 4/15. Mine came in March, but always had me wondering if they would be on time.

 

[Lakedog]

Sold the few MLPs I owned several years ago rather than deal with K-1s. There are similar companies (pipelines) that are now c corps like KMI, OKE, WMB that I prefer. Many of these c corps will have a % of the annual divs paid as ROC so some tax would be delayed until you sell (or hit zero basis) if held in a taxable account.

 

[RetMD21]

The state taxes were the killer for me. No tax due generally but it was a pain in the neck.

 

[LarryMelman]

The state taxes were the killer for me. No tax due generally but it was a pain in the neck.

When does it become a pain in the neck? I mean, you need to be aware of the filing thresholds in the various states, but for modest investments do you ever actually have to file returns?

 

[RetMD21]

When does it become a pain in the neck? I mean, you need to be aware of the filing thresholds in the various states, but for modest investments do you ever actually have to file returns?

If you are above the threshold and don't prepare the tax form how would you know?

 

[triangle]

I have held a few MLPs over the years, maybe 2 or 3 at the same time for a few years. It was mostly trouble free, except for having a few minor issues with TurboTax ~10-15 years ago where it was confusing to get all the necessary information entered in order complete the return, but I think that was around one entry where a textual description was needed.

It may also depend on the company/industry, as I held Terra Nitrogen (TNH) for years until it was taken private, and never had any issues with entering/filing their information. They provided clear guidance with their K-1 forms and tracked everything year-to-year.

I personally would not avoid an investment if it issued a K-1, but I would also not purchase a very small position (dollar or overall percentage wise) just to diversify or whatever as there is some extra overhead in collecting forms, entering the data, etc, for tax filing.

 

[djsander]

If you are above the threshold and don't prepare the tax form how would you know?

That’s a good question. I checked through the states that mine were in to see what their non resident filing requirements are. Surprisingly some states have very low limits almost to the point if you make any money as a non resident you are supposed to file a return. I had one gotcha which was Oklahoma and ended up filing a return after the fact and sending them a small check. I had about 8-10k on gains as I held some for 2 years. Fortunately the three major states were Texas no personal income tax, Louisiana which I was a resident so that was covered and Oklahoma which I missed when I figured out my taxes, but caught it the following year. Trying to figure out the percentage of assets in each state was a little tricky, but I used on the supplemental information in the K1. The sales form did have specific % for North Dakota and Oklahoma that were to be used. I’m guessing most people unless they hold a lot that the multiple states won’t be an issue except for possibly a state with a large percentage of the assets.