Master Limited Partnership is a limited partnership that is traded on the public exchanges just like corporate stock. A share in an MLP is called a “unit,” and its investors are “unitholders.” They are also called Publicly Traded Partnerships.

A limited partnership consists of a general partner and the limited partners. The general partner manages the day-to-day operations and holds a small percentage ownership stake. The limited partners (or common unitholders) have no role in the partnership management but rather provide the capital and receive cash distributions.

Advantages of Master Limited Partnerships (MLP)

Distributions. The biggest advantage of investing in MLPs is the quarterly cash distribution, which provides high current and tax-deferred income. MLP yield is hard to find in corporate stocks. For example, the median yield for energy MLPs as of September 30, 2008 was 9.5%. In addition, many MLPs make it a policy to increase distributions as often as possible.

Taxes. While investors are responsible for paying tax on their share of the partnership’s income, their taxable income is considerably lowered by their share of the partnership’s deductions (such as depreciation) and losses. Moreover, the distributions are not taxed as current income but are considered a return of capital and are not taxed until the partnership units are sold.

As with other securities, PTP units may be left to the owners’ heirs, whose basis in the units will be stepped up to market value at the testator’s death. Thus, if unitholders retain their units until death, neither they nor their heirs will pay the deferred tax on the pre-death cash distributions.

Diversification. While they are concentrated within the energy sector, they cover a wide range of businesses within that sector. According to studies, the movements in MLP prices have tended not been highly correlated with changes in the broader stock market, interest rates, and commodity prices. They are not affected by market fluctuations.

Industry. Due to IRS restrictions, MLPs are concentrated in natural resource industries that are the backbone of America. They help produce, gather, process, and transport the oil, gas, and coal products that America relies on for energy independence. Those in the midstream sector earn their revenue through contracts for processing and transporting oil and gas that are not affected by fluctuations in energy prices.

Good Prospects. MLPs are poised to be part of the future of alternative energy sources. Legislation was recently enacted that expands current law to allow MLPs to transport and store alternative fuels such as ethanol and biodiesel. Pipelines to transport these fuels will be vitally needed and do not yet exist. It will be MLPs that build them.

Disadvantage of Master Limited Partnerships (MLP)

Complex Taxation. Ownership of MLP units creates a more complex tax situation for the investor. Instead of a 1099, investors recieve a K-1 form detailing the various types and amounts of income, deductions, gains, losses, and credits that the MLP is passing through to them, and have to enter the amounts in the appropriate places on their own tax returns. Moreover, the investors' basis in its units fluctuates, adjusted upwards for the net taxable income and downwards for losses and distributions.

Limited Use of Passive Loss. Normally passive loss from partnerships can offset passive income of other passive activities. MLP’s passive loss must be only applied against future gains from that specific MLP. Any suspended losses not offset by future gains are deductible only when the partner completely disposes of the partnership interest.

Multi-State Taxation. Investors may be subject to tax in more than one state. Because of the passthrough nature of an MLP, investors are subject to state tax wherever an MLP earns income.

Additional Tax for Retirement Funds and Tax-Exempt Institutions. Retirement funds and tax-exempt institution share of MLP income is considered unrelated business income, as if they had earned it directly, and subjects them to unrelated business income tax (UBIT) on amounts over $1,000.

- We are CPAs, tax accountants, tax preparers, business managers and consultants based in Torrance, CA near Los Angeles & OC, serving the entire U.S. See us at Google+, Yelp, Google Brand, Yelp. Call us (424) 278-4838 or e-mail us at This email address is being protected from spambots. You need JavaScript enabled to view it. .