Are the cash distributions received from LINN Energy taxable?
In general, cash distributions received from LINN Energy are not taxable. You are typically only required to report in your tax return items of income, gain, loss, deduction or tax credit reflected on your Schedule K-1. However, if the cumulative cash distributions received from LINN Energy exceed your tax basis in the Company, you could be taxed on the amount exceeding your tax basis.
What is a Schedule K-1?
LINN Energy is a publicly traded limited liability company and classified as a partnership for federal income tax purposes. With partnership tax status, LINN Energy is not a taxable entity at the company level. However, the Company is required by the Internal Revenue Service (IRS) to pass through income, gain, loss, deduction and credit to its unitholders (partners) to report in their respective income tax returns. A Schedule K-1 is the IRS form that LINN Energy is required to use for reporting such pass through items to each unitholder.
Why do I receive a Schedule K-1 and not a Form 1099?
Since LINN Energy is classified as a partnership for tax purposes, a unitholder is considered a partner and receives a Schedule K-1 to report the partner's share of LINN Energy's income, gain, loss, deductions and credit. The Schedule K-1 also includes other informational items such as distributions.
A Form 1099 is used to report taxable payments such as royalty and interest income. LINN Energy does issue Form 1099s for individuals that own an interest in LINN wells and receive payments from LINN for production from that well.
How do I access my Schedule K-1 online or get additional information concerning my Schedule K-1?
You may access your Schedule K-1 on the LINN Energy website within the Investor Center under K-1 Tax Information. Any questions related to your Schedule K-1 should be directed to the LINN Energy K-1 Assistance Line at (800) 203-5179.
Why don't I receive my Schedule K-1 by January 31, which is the same date required for the Form 1099s?
The required distribution date for Schedule K-1 is different than that for Form 1099. Federal law requires partnerships to provide Schedule K-1 to partners by April 15 (or the extended due date of September 15). However, LINN Energy strives to provide its Schedule K-1 as early as possible. The 2008 Schedule K-1s were made available to unitholders on March 20, 2009.
Before LINN Energy can prepare and distribute the Schedule K-1 to unitholders, the Company must obtain information regarding partnership units bought or sold during the year from brokerage firms or transfer agents. Much of this information, in accordance with applicable law, is not provided to partnerships until late January. Following a review and transfer of this information, the final books of the partnership must also be closed and other information (for example, reserves) must be calculated, reviewed and processed. Completing all of these K-1 related tasks has historically resulted in printing and mailing within the month of March.
If I invest in LINN Energy, in what states will I be required to file returns?
Different states have different filing requirements for resident and non-resident partners. To be in compliance with state laws, the partnership reports your K-1 information to the states in which it operates. You should check with your tax advisor to discuss the state income tax filing requirements.
How are distributions treated for tax reporting purposes?
Distributions are generally 100 percent return of capital and decrease your tax basis in the partnership. At year end, your basis is increased by your share of the partnership's taxable income allocated to you on your Schedule K-1 or, conversely, is reduced by your share of the partnership's loss allocated to you on your Schedule K-1.
Why is the amount of the cash distributions I received different from the amount of taxable income I have to report on my income tax return?
LINN Energy distributes a portion of its available cash flow to partners as determined by the Company and as required by its governing documents. This distribution is not reported as income on the partner's Schedule K-1 and is generally 100 percent return of capital. The amount reported on the Schedule K-1 is the partner's allocated share of income of the partnership and typically is reduced by certain deductions allowed by the Tax Code (on the Schedule K-1 reported income is generally located in Boxes 1 through 11 and deductions are generally reported in Boxes 13 and 20).
If I sell my units, how is my tax basis determined for computing gain or loss?
Your tax basis is the original amount paid for the partnership units. The basis is increased by cumulative income and gains and reduced by cash distributions, cumulative amounts of loss, deductions and credits reported on the Schedule K-1.
If I sell my partnership units at a gain, why is part of the gain treated as ordinary income rather than capital gain?
A sale of partnership units is treated as if there was a sale of the partner's allocated share of the partnership's assets. Intangible drilling costs, depreciation or depletion previously taken as ordinary deductions with respect to disposed units are potentially required to be recaptured as ordinary income rather than capital gain. If you dispose units during the taxable year, we will provide you with a sales schedule in your tax package.
The sales schedule includes an "ordinary gain" column which represents the amount of ordinary income on your sale of units (or §751 gain). The majority of this amount represents your disposed units' allocated share of intangible drilling costs, depreciation and depletion deductions.
What is tax shield?
The distributions from LINN Energy are normally return of capital and tax-deferred through reduction of basis in your units. For example, if the allocated taxable income reflected in your Schedule K-1 is $200 but you received a $1,000 distribution, you will only be currently taxed on the $200 taxable income amount reported on the Schedule K-1. The remaining $800 distribution will be shielded. Therefore, you have a tax shield of 80 percent.
If my tax shield is greater than 100 percent, how does it affect my tax basis?
If your tax shield is more than 100 percent, your schedule K-1 reflects a net taxable loss. Your unit tax basis is still decreased by the net loss amount, but you cannot deduct the net loss amount. Instead, it will be suspended and carried forward to future taxable years to offset your taxable income from LINN Energy or become deductible when you sell all of the units.
What is UBTI?
UBTI (unrelated business taxable income) is the taxable income that a tax-exempt organization/entity earns from business activities unrelated to its tax-exempt purposes. A retirement plan account, such as IRA or 401(k), is a tax-exempt account and can earn up to $1,000 UBTI tax free.
What are the UBTI amounts that are generated?
UBTI (unrelated business taxable income) varies for each unitholder. In most cases, the amounts of UBTI generated from LINN Energy are insignificant as a result of the deductions derived from the intangible drilling costs, depreciation and depletion. It is always best to consult your tax advisor prior to investing in any company to determine the appropriate account in which to place that investment.
What portions of the items reported to me on my Schedule K-1 are subject to the 3.8% surtax on net investment income enacted by the Health Care and Education Reconciliation Act of 2010?
For tax years beginning after 2012, new Internal Revenue Code (“IRC”) Section 1411 imposes a 3.8% surtax on certain passive investment income of individuals and of trusts and estates. Absent material participation in the operations of Linn Energy, LLC or another exception, we expect that all items of income, gain, loss and deduction reported to you on this Schedule K-1 would be considered net investment income for purposes of IRC Section 1411. This includes the gain or loss on the sale of Linn Energy, LLC units. This is also referred to on Line 20Y of your Supplemental Schedule in your Schedule K-1 package. We encourage you to consult your tax advisor concerning the impact of IRC Section 1411 to you.
What is the amount reported to me on Line 20Z, Other Information?
Under the current federal income tax rules, the partnership is allowed to take bonus depreciation on assets meeting certain criteria. Certain states do not follow the federal treatment with regard to these provisions (non-conforming states). If you reside in one of the non-conforming states, please note that when preparing your resident state income tax return you must adjust the amount reported on Box 1 of your Schedule K-1 by the bonus depreciation adjustment provided in the Schedule K-1 Supplemental Information Box 20Z. If you are a non-resident of a non-conforming state, please note that any necessary bonus depreciation adjustment is included in your apportioned state Net Ordinary Income or Loss shown in Column 1 of the state schedule.
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