Tax Considerations for Owning CEQP – in a Retirement Account
As is generally the case with partnerships, the preferred shares (units) also issue K-1 tax forms. Investors should be aware of the tax implications of becoming a limited partner when investing in these instruments. Of particular concern with CEQP– are potential UBTI consequences (Unrelated Business Taxable Income) if it is owned in a retirement account. Typically the UBTI amount on K-1s from preferreds is minimal, however, recent K-1s have shown that income from the CEQP preferreds to be almost 100% UBTI.
HDO cannot give advice for your specific tax situation, but the general recommendation is that partnerships that issue K-1s are best held in taxable accounts. It's permissible to own CEQP– in an IRA account, but even though a retirement account may be tax advantaged, it incurs a tax liability if the reported UBTI for the year exceeds the $1,000 exemption. Our understanding is that UBTI taxes can be substantially higher than ordinary income rates even with the $1,000 exemption, so this shouldn’t be taken lightly.