Taxes for Investments in Partnerships, LLCs, LPs
Even if you invest in these kinds of entities in an IRA there could be unexpected tax implications.
You will receive a K-1 form for tax purposes—not a 1099-DIV since income from non-corporate entities are not considered dividends.
ROYALTY INCOME (Code T): Your K-1 will have a multitude of codes. Some of the income may be from royalties. If so, there will be a CODE T for depletion. You will probably be able to take a 15% depletion allowance, but it will not be shown on the K-1. Line 17 of the Partnership or LLC return is for depletion BUT it specifically states NOT for Oil and Gas depletion. When I prepare a return for a Partnership or LLC, I provide an attachments for the company to give K-1 recipients with the following message:
“If an LLC member uses percentage depletion, he must apply the 65%-of-taxable-income limit using ALL of his taxable income.”
In the event the investor has a very low taxable income, this would be relevant.
UNRELATED BUSINESS TAXABLE INCOME (Code V): If you have over $ 1000 in UBTI, you must file a Form 990 and pay tax on it, even if it is an IRA investment. After I invested in several Master Limited Partnerships, I became concerned with the possibility of over $ 1000 such income, and transferred one of them out of my IRA to limit the income to less than $ 1000. However, when I got my K-1s the amounts in Code V, in every case, were small negative amounts. Nevertheless, the possibility of UBTI could arise with some such MLPs. Your broker may prepare the Form 990 for you or you may have to prepare it yourself. I have no experience since I’ve never had this come up, so anyone having this situation would need to investigate further.