Owning units in Energy Transfer LP changes your tax return in ways that regular stock ownership never does, and Energy Transfer K-1 tax filing is where most of that complexity lives. Instead of a Form 1099-DIV, you receive a Schedule K-1 (Form 1065) reporting your share of the partnership’s income, deductions, and credits, which you carry onto your Form 1040.1Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) The partnership itself pays no federal income tax; it passes everything through to unit holders, and you handle the reporting yourself.
When the K-1 Shows Up
Energy Transfer’s pass-through accounting spans every state where it operates, so K-1 packages generally don’t reach investors until mid-March or early April. You can pull yours electronically from the Tax Package Support portal at taxpackagesupport.com/et.2Energy Transfer. K-1 and K-3 Tax Package Information
If yours hasn’t arrived by mid-April, filing Form 4868 gives you an automatic six-month extension to October 15.3Internal Revenue Service. Get an Extension to File Your Tax Return The extension covers late-filing penalties but not late-payment penalties. If you expect to owe, estimate the amount and pay it by April 15 to avoid interest.4Internal Revenue Service. Form 4868 – Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
The K-1 Boxes That Matter
The K-1 carries dozens of numbered boxes, but a handful of them do most of the work for a typical Energy Transfer unit holder. Always read the supplemental statements that come with the K-1 alongside the form itself; the codes point to those pages for the detail behind each figure.
Box 1: Ordinary Business Income or Loss
Box 1 is your share of Energy Transfer’s operating profit or loss.5Internal Revenue Service. IRS Form 1065 Schedule K-1 – Partner’s Share of Income, Deductions, Credits, etc. For unit holders not involved in managing the business, this is passive income, reported on Schedule E, Part II of Form 1040.6Internal Revenue Service. About Schedule E (Form 1040) A loss in Box 1 runs into the limitation rules described further down.
Box 13: Other Deductions
Box 13 lists deductions allocated from the partnership under lettered codes. The ones Energy Transfer investors see most often are investment interest expense (Code H) and excess business interest expense (Code K).7Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) – Box 13 Each code routes to a different line on your return, so match every code to the correct form using the K-1 instructions.
Box 19: Distributions
Box 19 shows the cash distributions you received. Code A is cash and marketable securities; Code D is deemed distributions from a decrease in your share of partnership liabilities.8Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) – Box 19 Neither amount goes on your return as income. Both feed your basis calculation, and only turn taxable once basis has been drawn down to zero.
Box 20: Special Allocations
Box 20 carries several important items. Code V reports unrelated business taxable income for tax-exempt partners, such as an IRA. Code Z reports the Section 199A information you need for the qualified business income deduction.9Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) – Box 20 Code Z
Tracking Your Basis
Basis is the single most important number in MLP taxation, and the IRS does not track it for you. Your basis determines whether distributions are tax-free, when they become taxable, and how much gain or loss you report on sale. Getting it wrong means misreporting income, potentially for every year you hold the units.
Starting basis is your purchase price plus transaction costs. From there, four adjustments change it each year:
- Your share of the partnership’s taxable income, tax-exempt income, and capital gains raises basis.
- Your allocated share of partnership liabilities also raises basis, which matters for the loss limits below.
- Your share of deductions, losses, and nondeductible expenses lowers basis. For an infrastructure-heavy partnership, depreciation is usually the largest driver here.
- Cash distributions reduce basis dollar for dollar.
Distributions are the piece most investors feel directly. Unlike stock dividends, MLP distributions are treated as a return of capital as long as your basis stays above zero, which makes them tax-deferred in the year received. Once cumulative distributions and other reductions push basis to zero, every additional dollar of distributions becomes taxable as a capital gain in the year received.10Energy Infrastructure Council. Basic Tax Principles
Keep a year-by-year spreadsheet of every adjustment. When you eventually sell, your final adjusted basis is what separates a correctly reported gain from an audit problem.
The Section 199A Deduction
One of the strongest benefits of holding Energy Transfer units is the Section 199A deduction, which lets you deduct up to 20% of your qualified publicly traded partnership income. The PTP component is not restricted by the W-2 wage or property tests that limit other qualified business income.11Internal Revenue Service. Qualified Business Income Deduction A fifth of the qualifying income Energy Transfer passes through to you may be shielded from tax entirely.
For the 2026 tax year, if your taxable income before the QBI deduction is $403,500 or less on a joint return ($201,750 for other filers), you can use the simplified Form 8995. Above those thresholds, you use Form 8995-A and the deduction begins to phase out.12Internal Revenue Service. Rev. Proc. 2025-32 Energy Transfer reports the figures you need in Box 20, Code Z; the accompanying statement breaks out qualified business income, W-2 wages, and unadjusted basis of qualified property. If your tax software doesn’t pull those numbers automatically, enter them manually on the QBI form.
How Losses Are Limited
When your K-1 shows a net loss, three separate limitations apply in order. You have to clear each one before the loss actually reduces your taxable income. Many Energy Transfer investors carry losses forward for years before they become usable.
Basis Limitation
You cannot deduct losses that exceed your adjusted basis. If the K-1 allocates a $5,000 loss but your basis is $3,000, the extra $2,000 is suspended until basis rises again. This is the first check, and the reason accurate basis tracking matters so much.
At-Risk Limitation
After the basis test, the loss must clear the at-risk rules of Section 465. You’re at-risk for money and property you contributed plus borrowings for which you’re personally liable. Nonrecourse debt generally does not count, with a narrow exception for qualified nonrecourse financing secured by real property.13Office of the Law Revision Counsel. 26 U.S. Code 465 – Deductions Limited to Amount at Risk Since Energy Transfer’s assets are pipelines and other infrastructure rather than real property, some of the partnership debt allocated to your basis may not qualify as at-risk. If the at-risk amount limits your deduction, report the calculation on Form 6198.
Passive Activity Limitation
The last gate is Section 469. For publicly traded partnerships, the passive activity rules apply separately to each PTP.14Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited Losses from Energy Transfer can only offset passive income from Energy Transfer. You can’t use them against wages, portfolio income, or passive income from a different MLP. Disallowed losses carry forward indefinitely on Form 8582.
This per-PTP isolation trips up most investors. Two MLPs, one with a loss and one with income, cannot be netted against each other.
UBTI in a Retirement Account
Holding Energy Transfer inside an IRA, 401(k), or other tax-exempt account creates a problem that surprises many investors. Because Energy Transfer runs an active business, the income allocated to your retirement account is unrelated business taxable income. A tax-exempt entity with $1,000 or more of gross UBTI must file Form 990-T and pay tax on the amount above a $1,000 specific deduction.15Internal Revenue Service. Unrelated Business Income Tax16Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income
The UBTI amount appears in Box 20, Code V. Your custodian is responsible for filing Form 990-T on the account’s behalf, but not every custodian handles it automatically. If yours doesn’t, the tax obligation still exists and penalties can pile up. Before buying units in a retirement account, confirm your custodian’s practice, and accept that you may end up paying tax on income that was supposed to be sheltered.
Multi-State Filing
Energy Transfer operates in numerous states. The K-1 allocates part of the partnership’s income to each of them, and because you’re treated as directly earning that income, a nonresident return is technically required in every state listed.
In practice, most of those state allocations are tiny, sometimes just a few dollars, and the cost of filing exceeds the tax owed. Many states have minimum income thresholds below which no return is required, and some listed states have no income tax at all. Check the state-by-state breakdown on your K-1 supplemental pages against each state’s nonresident filing rules before deciding which returns to prepare. Ignoring the obligation entirely carries some risk of penalties and interest from the more aggressive revenue departments.
Selling Your Units
Selling MLP units is more involved than selling regular stock. The transaction splits into two tax components, a capital gain or loss piece and an ordinary income recapture piece, and both depend on the basis tracking you’ve been doing since you bought in.
Capital Gain or Loss
Subtract your final adjusted basis from the net sale price. That difference is your capital gain or loss, reported on Form 8949 and Schedule D.17Internal Revenue Service. About Form 8949 – Sales and Other Dispositions of Capital Assets Held more than a year, the gain qualifies for long-term capital gains rates. Because MLP distributions steadily reduce basis, many investors find their adjusted basis is far below what they originally paid, producing a larger gain than expected at sale.
Section 751 Ordinary Income Recapture
The second piece is the Section 751 “hot assets” gain. When Energy Transfer passed depreciation deductions through to you over the years, those deductions cut your ordinary income at your marginal rate. On sale, the IRS reclaims that benefit. Accumulated depreciation is reclassified as ordinary income, taxed at your regular rate rather than the lower capital gains rate.18Office of the Law Revision Counsel. 26 U.S. Code 751 – Unrealized Receivables and Inventory Items
Your brokerage should provide a Form 1099-B that breaks out the Section 751 ordinary income from the total proceeds. Report the ordinary income portion on Form 4797.19Internal Revenue Service. Instructions for Form 4797 Total gain equals the capital gain plus the ordinary income recapture. For long-term holders, the Section 751 amount can be substantial because the pipeline assets generate heavy depreciation year after year.
The Final K-1 and Suspended Losses
In the sale year, you receive a final K-1 covering January 1 through the sale date, with income, deductions, and distributions allocated during that partial year. You need those figures to calculate the final adjusted basis before computing gain.
The sale also releases any passive losses you’ve been carrying forward. Disposing of your entire interest in a PTP in a fully taxable transaction unlocks all suspended passive losses from that partnership. They first offset other passive income; anything left offsets non-passive income like wages or investment income. For investors with years of accumulated losses, this release can meaningfully reduce the tax hit from the sale.
Net Investment Income Tax
High-income investors face an additional 3.8% net investment income tax on the gain. It applies when modified adjusted gross income exceeds $250,000 on a joint return or $200,000 for single filers, and those thresholds are not adjusted for inflation. Gain from selling a partnership interest counts as net investment income to the extent it would be treated as such if the partnership sold all its assets at fair market value immediately before the disposition.20Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax The same 3.8% tax can also apply to passive income allocated by the K-1 in years you hold the units, so it isn’t only a sale-year concern.21Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
If You Inherit the Units
Inherited units are treated very differently. Under Section 1014, inherited property generally takes a basis equal to fair market value on the date of the decedent’s death.22Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent That stepped-up basis effectively wipes out the deferred tax that built up during the original owner’s lifetime, including the depressed basis from years of return-of-capital distributions and the Section 751 ordinary income recapture that would have hit hard on a regular sale. Heirs begin their own basis tracking from the stepped-up figure.