How to Handle PTP 1099 and K-1 Forms Without Double Counting Distributions

Thanks for the explanation. I have a similar situation, but I'm still confused. My tax software (TurboTax) seems to want me to input both forms. When I do that, it shows my income as WAY higher than it should be. Is there a specific box or something I need to check to tell the software these are related?

Wait, so the 1099 shows cash received but K-1 shows taxable income? What if my K-1 shows more income than what I actually received in distributions? Do I still have to pay taxes on income I didn't actually get in my pocket??

When entering the 1099 information, you should be able to exclude or remove the PTP distributions from that form since they'll be properly accounted for through the K-1. Look for options like "income reported elsewhere" or "amounts previously reported" in your software. If you can't find this option, you might need to manually adjust the 1099 amounts to prevent double counting. Yes, this is a key point with partnerships - you can absolutely have taxable income that exceeds your actual cash distributions. This is called "phantom income." You're taxed on your share of the partnership's income regardless of whether it distributes that money to you. The partnership might retain earnings for operations or investments, but you're still taxed on your portion. This is one of the tax complexities of PTPs that catches many investors by surprise.

Does it work with all tax software? I'm using FreeTaxUSA this year and have three different K-1s plus regular brokerage stuff. Would love to avoid paying an accountant $300 just to tell me where to put these numbers.

I'm skeptical about these tax tools. How does it know which entries are duplicates? PTPs can have some really complex allocations and I wonder if software can really catch everything. Did you verify the results against what a professional would do?

It's designed to work alongside any tax software - it doesn't replace your tax software but tells you how to enter information correctly in whatever program you're using. It gave me specific instructions for each form field in FreeTaxUSA when I used it, so it should work fine with your three K-1s. I actually did compare the results with what my accountant did the previous year. That's why I was so impressed. It caught the same issues my accountant pointed out but at a fraction of the cost. For PTP specifically, it identified exactly which box on the K-1 corresponded to the distribution reported on my 1099 and explained the difference between taxable income allocation and cash distributions, which was my main confusion.

How does this even work? I thought the IRS phone system was completely broken. I tried calling last month about my K-1 question and gave up after 40 minutes on hold.

Sounds too good to be true. You're telling me this service magically bypasses the IRS phone queue that everyone else has to wait in? I've literally spent 3+ hours on hold multiple times and still got disconnected. If this actually worked, everyone would be using it.

It uses a combination of automated calling technology and timing algorithms. Basically, it keeps calling the IRS for you using optimal call patterns based on historical wait time data. When it finally connects, it calls your phone and connects you directly to the agent. You don't have to sit on hold - you just get a call when an agent is on the line. I was definitely skeptical too! I had tried calling about my PTP issue three separate times and kept getting the "due to high call volume" message or ridiculous wait times. The IRS phone system is definitely still broken, but this service has found a way to work within that broken system. It's not magic - it's just smart technology that keeps trying different times and numbers until it gets through. The demo video shows exactly how it works if you're curious.

Oh great, another layer of complexity! Do most tax software programs handle the basis tracking automatically? Or do I need to keep my own separate spreadsheet for this? I'm afraid I might miss something important.

Most consumer tax software doesn't track this automatically across multiple years - that's one of the big challenges with PTPs. You'll typically need to maintain your own spreadsheet or basis worksheet. Start with your initial investment as your beginning basis. Each year, increase your basis by the income items on the K-1 (usually boxes 1-11) and decrease it by distributions (box 19) and deduction items. The partnership often provides a basis worksheet with the K-1 that can help. This becomes critical when you sell, as your adjusted basis determines your gain or loss. If you've held the PTP for several years already and haven't been tracking this, you might want to work with a tax professional to reconstruct your basis history.

This is actually a really important question! PTPs in retirement accounts can create unexpected issues. If the PTP generates Unrelated Business Taxable Income (UBTI) over $1,000, your IRA itself might have to file a tax return (Form 990-T) and pay taxes, even though it's normally tax-advantaged. Look at Box 20, Code V on your K-1s - this shows UBTI. Many investors don't realize this can create a tax liability even within an IRA. If the amount is small, you might not need to worry, but it's something to monitor.

@Hailey O'Leary is absolutely right about the UBTI issue. I learned this the hard way when my IRA had to file Form 990-T and pay taxes on $1,200 of UBTI from an MLP I held. Your IRA custodian should handle the filing and payment, but they'll charge you fees for it (mine charged $150 for the filing plus the actual tax owed). Some custodians will even automatically liquidate part of your IRA holdings to cover these costs. Check with your IRA provider about their policy on UBTI - some will send you a bill, others will just deduct it from your account. Either way, it's an unpleasant surprise if you're not expecting it. Many people end up moving their PTP/MLP investments to taxable accounts to avoid this issue entirely.

This is really helpful! I'm dealing with my first PTP this year and was completely lost. One quick follow-up question - when you say "back out" the PTP distributions from the 1099, do you literally enter a negative number somewhere, or is there usually a checkbox or something? I'm using TaxAct and want to make sure I do this right. Also, should I be worried if my K-1 taxable income is way different from what I actually received in cash? My distributions were about $800 but the K-1 shows like $1,200 in taxable income.