Tax considerations before investing in a publicly traded partnership
Publicly traded partnerships (PTPs) are partnerships that are regularly traded on a securities exchange or can be readily tradable on a secondary market.
PTPs can be attractive investments due in part to their more frequent distributions. These distributions are in the form of return of capital (ROC), which may provide tax benefits to the investor. However, investments in PTPs often result in unintentional tax consequences.
Before investing in PTPs, funds should take the following issues into consideration:
1. The timing of your tax returns
PTPs issue their own K-1s. Before you can complete your fund’s tax return, you will need to receive the K-1s for all the PTPs your fund is invested in. Most PTP K-1s do not become available until mid-March. The tax deadline for filing your Form 1065 is March 15. A tax extension can easily be filed for the fund; however, if the PTP K-1 is not provided before the individual tax deadline of April 15, your fund’s investors will need to file their own individual tax extension.
2. The cost of your tax returns.
Each K-1 will need to be incorporated into the fund’s tax return, which often results in costly complexities. For example, as mentioned above, distributions from PTPs are in the form of ROC. Tax treatment for ROC differs from dividends received from common stock. ROC is a return of your investment in the PTP, which reduces your basis. Your basis for each PTP will need to be tracked and adjusted for any ROC received.
Even if you do not receive ROC distributions, your basis in the PTP will change each year based on the income or loss allocated to you.
Further, investments in PTPs may result in additional state tax reporting obligations for the states the PTP has investments or conducts business in. This results in additional tax preparation fees for each state tax return that is prepared.
Even if the PTP does not result in additional state tax returns, due to the complexity of PTPs, extra time and cost will be incurred for your tax return. Depending on the number of the PTPs invested in by your fund and the number of additional required state tax returns, this cost is often significant.
Addressing concerns about investing in a publicly traded partnership
While we have highlighted only two general issues when investing in PTPs, there are many more complexities to consider. We strongly encourage you discuss any potential investments in a PTP with your tax advisor to understand the tax consequences specific to your fund.
Although PTPs can be an attractive and successful part of your fund’s investment strategy, it is important to determine whether the benefits of these investments outweigh the associated time and cost. Feel free to contact us, as we are happy to discuss any questions or concerns with you.
