How to Calculate Tax Basis of Publicly Traded Partnership

Per IRS definition, "a publicly traded partnership (PTP) is any partnership an interest in which is regularly traded on an established securities market regardless of the number of its partners".

If you purchase shares (or units) of a PTP, you are a partner of the PTP. As a partner of a PTP, it is important to track your tax basis in the partnership. Your tax basis in a partnership is the amount you paid to purchase the partnership shares adjusted by your shares of the partnership income, loss, deductions, distributions and certain other items allocated to you from the partnership.

There are several reasons to track your tax basis in the partnership: First, to determine whether your distributions from a partnership is tax free. You don't need to pay tax for partnership distribution as long as the distribution is less than your tax basis. Second, to determine if your share of partnership loss is limited. Generally, you can't deduct loss that's more than your tax basis at the year end. Third, to determine gain or loss from selling your partnership interests. When you sell your partnership interest, your gain or loss is the difference between sales proceeds and your tax basis.

You may find your tax basis on the item L, part II of partnership K-1 you received. If the box next to tax basis is checked, the ending capital account balance is your tax basis at year end. If you can't find tax basis or are not sure whether the tax basis provided on K-1 is correct, you can calculate your tax basis by yourself. Here is an example to help you calculate the tax basis of your interest in a publicly traded partnership.

Example: Peter bought 800 shares of ABC partnership, a publicly traded partnership for $8,000 in year 1. He also sold 100 shares for $1,100 before the end of year 1. He owned the rest of shares for three years and sold all of them for $6,500 in year 3. Peter used the following worksheet to calculate his tax basis in ABC partnership and gain or loss from the sales.

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For more information, please see Partner's Instructions for Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. (For Partner's Use Only) and IRS Publication 541 and 551.