A Closer Look at Master Limited Partnerships and Taxation

Jan. 06, 2010 7:14 AM ETAB, FIG-OLD, IEP, LAZ, SCU, KKR12 Comments
Elliott Gue profile picture
Elliott Gue

I’ve written about master limited partnerships [MLPs] extensively in Personal Finance and in the dedicated MLP advisory service I co-edit with Roger Conrad, MLP Profits.

The group boasts three main attractions: high yields, growing distributions and tax-deferral advantages. The average MLP in the benchmark Alerian MLP Index currently offers a yield just under 7 percent, and several offer payouts of more than 10 percent.

Only a handful of MLPs have actually cut their distributions over the past two years, despite the fact that troubled credit markets and plummeting demand for energy commodities were headwinds in late 2008. The credit crunch and the Great Recession were key stress tests that the MLP sector passed.

Finally, the group offers major tax advantages. The reason is that a good portion of the income you receive from MLPs is considered a return of capital, which isn’t immediately taxable. Instead, RoC reduces your cost basis in an MLP and isn’t taxed until you sell your units.

Roger and I are often asked if there’s a potential for the Obama administration to change the tax laws governing MLPs such that they lose their significant tax-deferral advantages. Although there’s no such thing as complete certainty in politics, there’s no sign of a change on the horizon.

Unfortunately, there is a great deal of misinformation published on the Internet and in print media concerning MLP taxation. Back in 2007 a series of articles published in major media outlets claimed that Congress was working on legislation to end the MLP tax advantage.

The same rumors have cropped up again lately because of an editorial published recently in The Wall Street Journal and quoted elsewhere. In both cases, these articles have been referring to a complex tax issue known as “carried interest.” The bottom line is that the energy-focused MLPs we recommend would not

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Elliott Gue profile picture
Elliott Gue knows energy. Since earning his bachelor’s and master’s degrees from the University of London, Elliott has dedicated himself to learning the ins and outs of this dynamic sector, scouring trade magazines, attending industry conferences, touring facilities and meeting with management teams. For seven years, Elliott Gue shared his expertise and stock-picking abilities with individual investors through a highly regarded, energy-focused research publication. Elliott Gue’s knowledge of the sector and prescient investment calls prompted the official program of the 2008 G-8 Summit in Tokyo to call him “the world’s leading energy strategist.” He has also appeared on CNBC and Bloomberg TV and has been quoted in a number of major publications, including Barron’s, Forbes and the Washington Post. In October 2012, Elliott Gue launched the Energy & Income Advisor (www.EnergyandIncomeAdvisor.com), a semimonthly online newsletter that’s dedicated to uncovering the most profitable opportunities in the energy sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships. Roger Conrad also contributes analysis of master limited partnerships and Canadian energy stocks to the publication. The masthead may have changed, but subscribers can expect the same in-depth analysis and rational assessments of investment opportunities in the energy sector.

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