MLP stands for Master Limited Partnership. A master limited partnership is a type of business structure that combines the tax benefits of a privately held partnership with the liquidity of a public corporation.
What are Master Limited Partnerships?
MLPs are partnerships that combine elements of corporations and partnerships. Partnerships are made up of individuals who share profits and losses either equally or as defined in a partnership agreement. Corporations are owned by shareholders who receive dividends when profits are earned.
MLPs are partnerships that issue units instead of shares. Units are traded on national exchanges. Unitholders are investors, and they receive income or losses according to the number of units that they hold.
MLPs have two classes of partners: limited partners (silent partners) and general partners (owners). The general partners manage the daily operations of the MLP, while the limited partners invest money into the company. The limited partners receive periodic distributions from the company, usually quarterly.
What qualifies as a Master Limited Partnership?
MLPs were originally a general type of business entity under the Tax Reform Act of 1986. The Revenue Act of 1987 restricted their use.
Today, an MLP must receive at least 90% of its gross income from a qualifying source. Qualifying sources can be revenue derived from real estate or natural resources.
How can you tell if a stock is an MLP?
You should read the prospectus, Form 10-K, and/or other disclosures before making any investment. These disclosures will explain the legal structure of what you’re investing in.
Tax Benefits of Master Limited Partnerships
An MLP is a type of partnership. There is no tax at the corporate level, since the partners or unitholders pay taxes based on their share of the profits or losses.
This provides a lower cost of capital than regular corporations. Companies that are eligible for becoming MLPs have a strong motivation to do so because it gives them a cost advantage over their non-MLP competitors.
MLPs generally have much more distributable cash flow than taxable income. This is because of depreciation and other tax deductions. Natural gas and oil pipelines and storage companies are the most common businesses structured as MLPs.
Money that investors receive that isn’t taxable income is considered a return of capital and deducted from the original cost basis. Since it’s a return of the investor’s original investment, there is no tax on these distributions.
Main Advantages of MLPs
MLPs are tax-advantaged securities. Since they avoid the double-taxation that normally applies to a corporation, you may receive a higher rate of return.
The return of capital distributions can also help improve your cash flow without adding to your taxable income.
MLPs are great diversifiers. They have a low correlation to other asset classes. Their yield is usually higher than other asset classes. They’re also often traded as separate stocks, making them easier to trade.
Main Disadvantages of MLPs
MLP shares are complicated to calculate taxes on. This makes them less attractive to investors who want to avoid these complexities.
Master limited partnerships have to distribute more of their income than corporations. This puts a handicap on the growth of the MLP, making it harder for the MLP to increase its distributions.
MLPs are businesses that produce oil or natural gas. They are also called master limited partnerships (MLP). These companies are publicly traded. They usually have a lot of debt because they need to buy more land to drill new wells. This means that the company needs to borrow money to buy the land. In addition, these companies issue shares to investors. Investors get paid dividends when the company makes money. Some people think that this is risky because these companies could lose money. However, some people say that this is safer than other types of investments.
When new debt is issued, there is less money available to go towards dividends. As a result, the company needs to use cash flow to pay down debt instead of paying out dividends.
Finally, MLPs may not be available in retirement accounts. If you are looking to invest with a tax advantage, this means that becoming a limited partner in an MLP may not achieve your financial goals.
How are MLP capital gains taxed?
There are two ways to receive capital gains when investing in MLPs.
- When you buy and sell units, capital gains or losses may apply the same way as when you buy or sell shares of stock.
- When the MLP generates capital gains on its investments, those capital gains will be included on your Form K-1 at the end of the year. Your Form K-1 will tell you if they were short-term or long-term gains.
What is the tax rate for MLPs?
MLP distributions may be subject to ordinary income tax rates or capital gains tax rates. The rate that applies depends on your tax bracket and your total income.
