Energy Partnerships - seems to be the next "best" thing?

[Jesse]

And mine are jumping into every energy partnership that comes along -- trying to increase their rate of return. Of course, all these produce K-1's with DP activities and intangible drilling costs and depletion, etc, all of which drive up the cost of processing them on the tax return. I wonder if it is really helping any. Most investments are $10K or less. After tax season, I am going to analyze.

I stole this from a different thread to start a new topic.

Can any of you finance oriented people jump in and help to explain what is up with these energy p-ships. Are they expected to make a great return on investment or what? Would you consider them more risky than stocks/bonds?

We have a financial planner in our area that has many, many people invested in these. It started in previous years in the IRA's, this year every other person seems to have these K-1's trickling in very late and they are "messy" from a tax prep stand point, so again I'm wondering if they are really worth the extra cost?

[tpnl]

One of my clients

is invested in several of these. Has been for years, but this is the first year he has brought in a K-1 (5 of them to be exact).

They are all just a few dollars and yes, tax prep went up. I can't believe the IRS has not sent him notices since they have never been reported. Of course I advise client that we should amend all his back returns. He doesn't want to.

[jimmcg]

I stole this from a different thread to start a new topic.

Can any of you finance oriented people jump in and help to explain what is up with these energy p-ships. Are they expected to make a great return on investment or what? Would you consider them more risky than stocks/bonds?

We have a financial planner in our area that has many, many people invested in these. It started in previous years in the IRA's, this year every other person seems to have these K-1's trickling in very late and they are "messy" from a tax prep stand point, so again I'm wondering if they are really worth the extra cost?

Benefits would depend on the type of energy involved. The ones I have seen lately involve wind, solar, and biomass projects and the benefits include accel. depreciation, production tax credits, and investment tax credits. The benefits would depend on each individuals unique financial situation and investment window. As to compared to stocks and bonds it depends on which stock and bonds you are referring to.

[Jesse]

Benefits would depend on the type of energy involved. The ones I have seen lately involve wind, solar, and biomass projects and the benefits include accel. depreciation, production tax credits, and investment tax credits. The benefits would depend on each individuals unique financial situation and investment window. As to compared to stocks and bonds it depends on which stock and bonds you are referring to.

One example is a K-1 with Ordinary Income of $175; Section 1231 gain of $45; Intangible drilling costs $75; Depletion $80

So now I generate a Schedule E; Form 4797; Schedule D for net income of $65.

All this for a $3,000 investment. It just seems that stocks, bonds, or even interest on a CD would bring as much or a higher rate of return especially after considering the tax prep fee.

I feel guilty for charging for all this busy work and for such minute amounts at that, but maybe that's just me. I just wonder what the long term goal might be?

[jimmcg]

One example is a K-1 with Ordinary Income of $175; Section 1231 gain of $45; Intangible drilling costs $75; Depletion $80

So now I generate a Schedule E; Form 4797; Schedule D for net income of $65.

All this for a $3,000 investment. It just seems that stocks, bonds, or even interest on a CD would bring as much or a higher rate of return especially after considering the tax prep fee.

I feel guilty for charging for all this busy work and for such minute amounts at that, but maybe that's just me. I just wonder what the long term goal might be?

Absent any minor current tax benefits my guess is that the long term goal is a play on significant future production and/or higher prices. Whether this is feasable or not I leave to others more astute than I to determine.

[JohnH]

All this time I thought the purpose of an investment was to make money, but my clients come in telling me how their investment advisor has put them in these "tax advantaged" investments. Seems to me the only tax advantage to most of them is the income taxes the broker pays on his commissions.

In all the years I've been in the tax business, I don't recall ever closing out a limited partnership or REIT that actually made money, even after all the tax shenanigans. Is this a trend, or are all my clients just incredibly unlucky?

[Lion]

Multiple Activities

I love the ones with a half dozen activities. You can't net passive income against passive losses in different activities, so you have to enter them all separately. With a half dozen K-1s with a half dozen activities each... And, all those states. None of my clients want me to file in all those states, but I warn them every year. I see lots of single digit numbers, both positive and negative, and straddles, and that production activity credit, and a SS credit here and there, lots of forms. And, then they complain about my fee. As I told one wife who passed along her husband's thoughts about my rising fees as she picked up their returns, "If your husband were still preparing your taxes, he would not have invested in all these energy partnerships!" To be fair, he's in a legal department of a national financial conglomerate, so is highly restricted in his own investments. He was smart enough to call me to see if my fee would be higher if he bought more partnerships or more units in his current partnerships. Another executive banker is invested in a foreign partnership run by her bank for it's high level employees. They hate filing extensions but don't get her K-1 until September.

[JohnH]

Wouldn't you think someone would stop and consider the ramifications of what they are asking? If I had to factor into my investment decisions the effect it might have on the cost of getting my tax return prepared, I'd have a few more questions about the wisdom of the investment. I'd be directing the hard questions at my investment advisor, not my tax preparer. Or am I just too simple minded?

[Burke]

Sometimes the tax info on the K-1 does not indicate what they are getting. Check out the distributions on 19A. The last guy I talked to was really happy with his "dividends." I guess he doesn't realize how that is affecting his basis and/or capital account. The favorite darlings of all the brokers around here seem to be Powershares of one type or another. I have one pending right now that has 6 of them. TP did not have a clue what they were.

[S T]

Same here

I have a couple of T/p and as I am tracking and comparing 2010 to 2009 and ask for the "Powershares" K-1 - not one of the taxpayer's know what it is I simply say you had it last year and I don't have the paperwork, and you have $$ invested in - so you need to contact your broker

Sandy

[FEDUKE404]

Another few things to consider

I've had several clients with those "investments." My guess is the stockbrokers make big (continuing) commissions and push them strongly.

One client was well into his 80's and had been sold some - more or less he had no idea of what was involved other than "good income."

When the K-1s started rolling in, that was bad enough.

As a tax person, it really became tough since a large part of my fees were derived from those investments. When you have MLPs and/or PTPs, the tax work ....... and record-keeping ........ can become daunting. ("Netting" passive gains/losses becomes prohibited!) You basically have to keep a "set of books" for each investment and any losses showing up have to be "stored" until that underlying asset is sold. Fortunately tax software is better now at tracking these types of things, but explaining the concept....and my much higher fees....to a client can be troublesome.

If you are not already aware of it, some brokerage firms just report the "income" in the monthly statements and those investment activities never even show up on the "tax documents." You may have to go looking for those K-1s, which frequently can be downloaded on the internet.

FE