What Are the Tax Implications of Owning a Master Limited Partnership?

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What Are the Tax Implications of Owning a Master Limited Partnership?

Although most investors do not wish to hold an MLP investment in an individual retirement plan, there are considerable tax advantages to holding units in a master limited partnership (MLP) (IRA).MLP distributions to unit holders are taxed favorably under the IRS rules. Because an MLP is a pass-through company, partnership income is solely taxed at the partner level. In contrast to dividends, which are taxed the year they are realized, distributions are not taxable when they are received. Instead, dividends are treated as a decrease in the cost basis of the MLP investment. The tax burden from the dividends is therefore delayed until the investment in the MLP is sold.

A master limited partnership (MLP) is a cross between a partnership and a publicly listed firm. The majority of MLPs are in the energy industry. In 1987, Congress restricted the use of MLPs to corporations operating in certain sectors, particularly those involved in natural resource enterprises. MLPs, unlike corporations, issue units rather than shares. An investor who purchases units in an MLP becomes a limited partner in the company. The general partner is in charge of the MLP’s operations.

MLPs continue to provide considerable liquidity since investors may purchase units on national stock markets. Income from an MLP is not taxed at the corporate level, avoiding the usual issue of corporate double taxation. Many MLPs own and operate capital-intensive enterprises like oil and gas pipelines and storage facilities. The MLP sends an investor a K-1 schedule outlining the investor’s part of the MLP’s net income. If the units in an MLP are held in an IRA, the income is not tax-deferred, so negating the tax advantages of an MLP investment.

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