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Thread: Master Limited Partnerships

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    Default Master Limited Partnerships

    Does anyone have experience in investing in Master Limited Partnerships? I was thinking of investing in a few, but I heard doing taxes for them is very complicated. Has anyone had to do taxes for Master Limited Partnership investments?

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    Default Re: Master Limited Partnerships

    it just so happens that one of the 'rich gringo's that was vacationing down here way south of the border was discussing this very issue ... in light of proposed US tax law changes regarding master limited partnerships. He is a general partner in a green energy MLP that provides not only tax deferrals but production tax credits.

    For every type of MLP, some portion of the income that partners receive from that MLP is considered to be a 'return of capital' which isn't immediately taxable. Return of capital reduces one's 'cost basis' in the MLP and isn't taxed until you sell your partnership units.

    For Energy MLP's, and other MLP's that constitute 'operating businesses', their carried interest earnings generate 'ordinary income'.

    For MLP's involved in private equity and investment management, SOME of their carried interest earnings stems from capital gains. As such, SOME of their carried interest earnings can be taxed at the lower 'capital gains' rates.

    In regard to the current situation in Washington ...

    (snip)Since we started MLP Profits we’ve repeatedly noted that these financial partnerships are in the Obama administration’s crosshairs and that the risk of this sort of legislation loomed. That’s why we’ve rated all of these partnerships “Sell” in our How They Rate table.

    The current consensus in Washington is that there aren’t enough votes in the Senate to pass this particular legislation. But the carried interest provision could be reintroduced in another bill if it doesn’t pass this time around. This is another chance to get out of the investment management partnerships if you haven’t already.

    There are two additional points worth noting. First, the Obama administration has proposed raising taxes on dividend income. Because MLPs don’t pay dividends, such a change would actually make them more attractive to investors because they’d become even more tax-advantaged relative to dividend paying stocks.

    Second, by addressing the carried interest issue and specifically targeting investment management partnerships, Congress has implicitly signaled continued support for the partnership structure as it applies to energy-focused MLPs.

    If you’re interested in reading more about carried interest and the House legislation, check out the National Association of Publicly Traded Partnership website . The NAPTP represents publicly traded partnerships’ interests in Washington and has been closely involved and consulting with Members of Congress involved in the writing of this and other bills. The NAPTP has published a useful question-and-answer document on the carried interest issue that summarizes the same basic points I just outlined. (snip)

    from


    Again, tax treatment of a specific MLP will depend on how that MLP is actually structured, whether the investor is a managing partner or a general partner, the type of business that MLP actually conducts etc. For general partners, and absent particular 'curve balls' like green energy production tax credits, the major tax filing issue is properly keeping track of the annual decline in 'cost basis' stemming from that portion of annual MLP earnings payout that constitutes return of capital versus 'ordinary income' or 'capital gains' income. This return of capital angle is a very clever legal 'trick' that effectively provides a significant reduction in the annual income taxes due on MLP earnings payouts.

    The kicker of course is that, over a period of many years, the remaining 'cost basis' of the MLP units can wind up being reduced to near zero ... meaning that when the partnership units are finally sold that the sale proceeds could be 100% taxed as 'ordinary income' at that future time. Historically, this arrangement has been exploited in a similar manner to 401k's or IRA's, with the angle also being to defer tax liability until after retirement ( when one's amount of taxable income thus effective income tax rate will be lower than during one's working years ). Of course, with other talk in Washington re the institution of 'means testing' for SSI retirement benefit eligibility and/or the size of SSI retirement benefit checks, MLP's carry a similar risk as 401k's and IRA's that future 'sales' of these investments to provide future retirement income may be ( partially ) offset by reduced SSI retirement benefit checks or other retirement benefit eligibility. But from a different perspective, if the MLP investor is 30 years from retirement age, odds are that there won't be a significant amount of SSI retirement benefits left to worry about potentially losing !

    ~
    Last edited by Melonie; 03-03-2011 at 03:20 AM.

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