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Tax Attributes

Master Limited Partnerships are just that – partnerships – which means they have different tax rules from that of a traditional corporation.  A corporation pays taxes on its earnings, and if the corporation pays any dividends to investors, the investor must also pay tax on the dividends received.  Therefore, a corporation is said to incur “double taxation.” 

Partnerships, on the other hand, do not pay taxes on their earnings at the partnership level.  All income, expenses, gains and losses are passed through to the investors and reported on the individual investor’s income tax return.  In this way, income is only taxed once allowing the Partnership more cash to distribute to its unitholders.  Thus, MLPs pay quarterly distributions to investors.  This distribution is not taxable to investors but is a return of capital up to the investor’s basis in the partnership.  After exceeding a partner’s basis, the distribution is taxable at capital gains rates.  Given this information, taxes related to an MLP investment are effectively 70%-90% tax deferred.

Finally, MLP investments are an effective tool for wealth transfer.  A MLPs cost basis steps up to fair value upon death which eliminates any deferred tax liability at the time of transfer.

 

This information is based on the current U.S. federal tax laws. It does not discuss all of the tax consequences that could be relevant to a particular investor. All investors are urged to consult their tax advisor in order to fully understand the tax consequences of an investment in a Master Limited Partnership.