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Hello Bruce,

This is a complicated area, but I would think most tax accountants would have a handle on partnership rules.

I am having a hard time following the numbers you provided in your scenario. Even though you have positive numbers on your K-1, some of those numbers are actually deductions (i.e. line 13). But, when you look at section L of the K-1, the current year decrease incorporates all of these items netted together with any income/gains. Also, make sure the ‘tax basis’ box is checked.

The partner's capital account analysis is as follows:

Beginning capital account 1,521
Capital contributed during year 0
Current year decrease -771
Distributions -882
Ending Capital account -132

Looking at your capital account, you start with the 1,521, then add your items of income/gains. Since I do not have your exact numbers, let’s assume zero even though you have dividends, interest, and capital gains (it will not make a difference this year). Now, decrease your basis by the distributions of 882. So, 1,521 less 882 is 639. You will not have to pay any capital gains since you had plenty of tax basis after your distributions.

Now, take 639 minus the net current year net decreases of 771 = -132. Therefore, since your tax basis cannot go below zero, you will have 132 of suspended losses.

Please note that the capital account on your MLP is correct. The negative number in the capital account signals to the tax preparer or the IRS that we should have suspended losses or a capital gain on distributions in excess of basis. You have not lost the 132 of suspended losses. Next year, when you do this all over again, you will carryforward these 132 in losses.

“I am puzzled by the concept of suspending items below 0.”

Your accountant should help you in this area. You will not be able to deduct the 132 of suspended losses in the current year as you need basis to take the deduction. You might also hear the term "at risk" basis.

Another area of tax law that will complicate matters even further is the passive loss activity loss rules. Most likely, unless you have another partnership with passive income, your 737 ordinary business loss will not be deductible in the current year due to the passive activity loss rules. Again, these passive losses will be carried forward indefinitely until you have passive income or you dispose of the partnership. Fun fun. If you want to read further about this area and at-risk basis, try IRS Pub 925.

“What are your thoughts on filing state tax returns."

You are correct on your thoughts. Your accountant will provide the necessary assistance in determining which states to file.

Again, good luck with everything.
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