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MLP
Income Tax & Liability Considerations
Tax Considerations
MLPs
offer a potential tax advantage because a portion of their payouts can
be tax-deferred. However, they may not be suitable for tax-sheltered
accounts, and the required income tax reporting is more involved, so
consult your tax advisor before investing in MLPs.
MLPs
usually specify the percentage of each distribution that is shielded
from ordinary income taxes. That percentage may vary from distribution
to distribution depending on a variety of factors. MLPs mail
individualized K-1 tax forms to each unitholder in late February or
early March of each year that specifies the tax treatment of the prior
year's payouts.
The
portion of a cash distribution that is not taxable must be subtracted
from you original purchase price to compute your new cost basis. When
you sell, some of your gain will be taxed at the lower capital gains
rate, but the portion of the gain that results from deductions such as
depreciation lowering your basis downwards will be taxed as ordinary
income.
If
your MLP is held in a tax-sheltered account such as an IRA, the
distributions may be considered unrelated business taxable income (UBTI),
and subject to tax. However,
it will not be taxed as long as the amount of this income and all other
sources of UBTI does not exceed $1,000 in any year.
Unitholder
Liability Considerations
Unlike corporations,
where shareholders have no liability for the corporations actions, an
MLP is a partnership, and, in theory, all partners are liable for the
obligations of the partnership. There
are limitations on limited partners liabilities, but they are not
fully shielded the way corporation shareholders are.
However, according to a spokesperson for the MLP trade group (see
below), in practice, individual unitholders have never been held
accountable for an MLP's actions.
For
more information about MLP tax and liability considerations, consult the
Coalition of Publicly Traded Partnerships’ site (www.ptpcoalition.org).
“Publicly traded partnership” is another name for MLPs, and the
coalition is the MLP trade group. |
