A publicly traded partnership, or PTP, is a business organized as a partnership whose ownership units trade on a public stock exchange or a secondary market, much like corporate stock. What makes it different from ordinary corporate stock is the tax treatment: as long as at least 90% of the partnership’s gross income each year comes from qualifying sources under Section 7704 of the Internal Revenue Code, the entity pays no federal income tax itself.1Office of the Law Revision Counsel. 26 USC 7704 – Certain Publicly Traded Partnerships Treated as Corporations The income flows through to you, the unit holder, and you report your share on your personal return. Most PTPs are energy businesses. Pipelines, storage, resource extraction. That’s not an accident of the market; it’s a consequence of how the tax law defines qualifying income.
How a PTP Is Structured
You buy “units,” not shares, and you become a limited partner rather than a shareholder. Units listed on the New York Stock Exchange, NASDAQ, or a similar market are readily tradable during market hours, and their price moves with supply, demand, and the underlying business.
Operations sit with a general partner, who runs the business and bears full legal responsibility for its liabilities. Limited partners put up capital, don’t participate in management, and can lose no more than what they invested. That legal structure is straightforward. The tax structure is where it gets interesting.
The 90 Percent Qualifying Income Test
The default federal rule is blunt: a publicly traded partnership gets taxed as a corporation. The exception that keeps most PTPs as pass-through entities requires at least 90% of gross income each year to be “qualifying income.”1Office of the Law Revision Counsel. 26 USC 7704 – Certain Publicly Traded Partnerships Treated as Corporations Miss that line and the entity gets reclassified and pays 21% corporate tax on all earnings before anything reaches you.
Qualifying income comes in two buckets. The first is passive investment income: interest, dividends, real property rents, and gains from selling assets held to produce that kind of income. The second is much broader and explains the energy concentration: income from exploring, producing, processing, refining, transporting, and marketing minerals and natural resources, including oil, gas, timber, fertilizer, geothermal energy, and industrial-source carbon dioxide.1Office of the Law Revision Counsel. 26 USC 7704 – Certain Publicly Traded Partnerships Treated as Corporations
Beginning in 2026, Pub. L. 119-21 widened the definition. Qualifying income now also covers transportation or storage of sustainable aviation fuel, electricity generation at carbon capture facilities where at least 50% of carbon oxide output is “qualified,” electricity from advanced nuclear facilities, electricity or thermal energy from certain qualified renewable resources, and operation of specified energy property.1Office of the Law Revision Counsel. 26 USC 7704 – Certain Publicly Traded Partnerships Treated as Corporations The change opens the PTP structure to a broader range of energy businesses than the traditional fossil fuel roster.
How You Get Taxed as a Unit Holder
A PTP that meets the qualifying income test pays no federal income tax at the entity level. Its income, gains, losses, and deductions flow through to unit holders in proportion to ownership. You report your allocated share on your personal return whether or not you actually received a cash distribution. That’s the mechanism that avoids the double taxation hitting corporate dividends.
Schedule K-1, Not a 1099
Instead of the Form 1099-DIV you’d get from a corporation, you receive a Schedule K-1 (Form 1065) each year showing your share of the partnership’s activity. The K-1 is long and detailed. It covers federal figures and sometimes state and foreign reporting too. It also tends to arrive later than a 1099, often in March or April if the partnership extends its filing deadline. Most investors carry the numbers over to Form 1040 with help from a tax preparer.
Cash Distributions and Tax Basis
The cash you receive from a PTP and the income you owe tax on are two different numbers. Your taxable income is what the K-1 allocates to you, which is often lower than the cash distribution you actually got, because depreciation and other non-cash deductions flow through the partnership.
When a cash distribution exceeds your allocated taxable income, the excess is treated as a return of capital that reduces your tax basis in the units rather than creating a current tax bill.2Internal Revenue Service. Publication 541 Partnerships Your basis starts at what you paid and adjusts every year: up for your share of income (taxable and nontaxable), down for distributions, your share of losses, and nondeductible expenses. If cumulative distributions push basis to zero, further distributions become capital gains.3IRS. Partner’s Outside Basis Tracking basis is essential and it stays with you as long as you hold the units.
Passive Losses Work Differently for PTPs
The passive activity rules are stricter for PTPs than for other passive investments. A loss from a PTP can only offset income from the same PTP. You cannot use a loss from one PTP to offset income from a different PTP, rental property, or any other passive source.4Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules The same restriction applies to credits.
If a PTP throws off a net passive loss and you don’t have passive income from that same PTP to absorb it, the loss suspends and carries forward. You can use it in a later year when that PTP produces passive income, or deduct it in full when you dispose of your entire interest in the PTP.4Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules Each PTP is its own silo. Investors holding several sometimes assume the losses pool. They don’t.
Selling Your Units
Selling PTP units is more involved than selling corporate stock. Gain or loss on a partnership interest is generally capital, but Section 751 carves out an exception for “hot assets,” meaning the partnership’s unrealized receivables and inventory items. If the PTP owns depreciable property, the depreciation recapture allocable to your share is taxed as ordinary income rather than at capital gains rates.5IRS. Sale of a Partnership Interest For energy PTPs sitting on billions of dollars of depreciable pipeline and processing assets, that ordinary income slice can be large. A lot of sellers are surprised when part of the “capital gain” comes back reclassified.
To compute your actual gain, subtract your adjusted basis from the amount realized. Your basis has been moving every year through income, distributions, and losses. Big return-of-capital distributions over many years can drive basis well below what you originally paid, producing a bigger gain than you’d expect on sale. Report the sale on Form 8949 and Schedule D, reconciling the broker’s 1099-B with the K-1 sales schedule the partnership provides.6IRS. Instructions for Form 8949 Any suspended passive losses from that PTP become deductible in the year you fully dispose of your interest.
Holding a PTP in an IRA
Putting PTP units inside an IRA looks like a way around the K-1 complexity. It does simplify your personal return, but it creates a different problem: unrelated business taxable income, or UBTI. When a tax-exempt entity like an IRA earns income from an active trade or business, that income can be taxable even inside the account.
If the IRA’s gross UBTI from all sources reaches $1,000 or more, the IRA trustee must file Form 990-T and pay tax at trust income tax rates. For the 2026 tax year, trust rates on UBTI start at 10% on the first $3,300 and climb to 37% above $16,000. Each IRA is treated as a separate trust and needs its own employer identification number to file. The return is due the 15th day of the fourth month after the IRA’s tax year ends.7Internal Revenue Service. 2025 Instructions for Form 990-T
Not every PTP generates enough UBTI to trip the filing requirement, and the passive activity limits apply separately to each PTP in the account. But the risk is real, and many advisors prefer to hold PTP units in taxable brokerage accounts. The pass-through features that make PTPs attractive, like basis reduction and deferred taxable distributions, lose most of their value inside a tax-sheltered account anyway.
You May Owe Taxes in Multiple States
Because a partnership’s activities are attributed to its partners, owning units in a PTP that operates across many states can create filing obligations in each of those states. A midstream energy PTP with pipelines in a dozen states can technically require its unit holders to file nonresident returns in every one.
Rules vary. About half the states with an income tax have no minimum dollar threshold, so even a tiny allocation can trigger a return. Others set minimum income or day-count tests. The amounts allocated and the resulting tax bills are usually small, but preparing all those returns adds real cost.
Many PTPs offer to file composite returns for nonresident limited partners, paying the state tax at the entity level and reporting it on your K-1. Check your annual K-1 package for a list of covered states and confirmation of whether you were included in the composite filing.
The Section 199A Deduction on PTP Income
Section 199A gives a deduction equal to 20% of qualified publicly traded partnership income, separate from the broader qualified business income deduction available to other pass-throughs. For PTP investors, it effectively cut the tax rate on allocated PTP income by one-fifth. The deduction applied to tax years beginning after December 31, 2017 and ending on or before December 31, 2025.8Internal Revenue Service. Qualified Business Income Deduction
Whether the deduction continues into 2026 depends on Congress. As of early 2025, bipartisan proposals to extend Section 199A had been introduced in both chambers. If you hold PTP units for the 2026 tax year, confirm whether an extension was enacted before you file. The stakes are meaningful: on $50,000 of qualified PTP income, the deduction saves roughly $3,700 in federal tax for someone in the 37% bracket.
What Happens if the 90 Percent Test Fails
If a PTP fails the qualifying income test, it gets reclassified as a corporation. The tax code treats the failure as if the partnership had transferred all its assets to a newly formed corporation in exchange for stock, then distributed that stock to the partners in liquidation of their interests.1Office of the Law Revision Counsel. 26 USC 7704 – Certain Publicly Traded Partnerships Treated as Corporations From that point the entity pays 21% corporate tax on its earnings, and distributions to investors become taxable dividends. Pass-through treatment is gone, and the effective tax rate on distributions roughly doubles.
Reclassification is rare. PTPs spend heavily on compliance monitoring because the consequences are that severe, and they cluster in energy and natural resources partly because those industries give the widest margin of safety under the qualifying income rules.