Master Limited Partnership (MLP)

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This article is about Master Limited Partnerships. For the article on the company with ticker MLP, see Maui Land & Pineapple Company (MLP).

MLPs are not like regular corporations and do not get taxed on income. Instead they tend to return most of their income (typically 85 to 90%) to investors or partners through quarterly distributions. This shifts the tax responsibility to the partners, who are taxed at their ordinary income rates. Since ordinary income rates of investors are typically lower than the income tax rates of corporations, this proves to be advantageous to the MLPs and hence their investors.

A Master Limited Partnership (MLP) combines the tax benefits of a limited partnership with the advantages of a publicly-traded company. When you compare that rate against the rate you paid for your 2007 personal income, the tax advantages of MLPs are laid out in sharp relief.

Limited partners are only liable for the amount they've invested, unlike general partners who have unlimited personal liability. Limited partners invest capital and then receive the tax benefit of a personal income tax deduction for part of the loss during the development stages of the partnership when the costs exceed any revenues. Limited partnerships are common when businesses are in development stages, but MLPs are unique in that their units are traded publicly like stock, creating much more liquidity for investors.

[edit] Tax Consequences

Since distribution income from MLPs is treated differently from dividend income from most stocks, at the end of the tax year, MLPs issue a Schedule K-1 to their investors. If the MLP pays out distributions in excess of the income it generates, the distribution is classified as a "return of capital" and tax deferred until you sell your shares or units. Please note that income from MLPs is often taxable even in retirement accounts like 401Ks and IRAs if the income exceeds $1,000. Hence investors tend to shy away from MLPs in retirement accounts and they are also not preferred by institutions.

[edit] Indirect Methods to own MLPs

Master limited partnerships are restricted by the U.S. government to natural resource companies and some real estate enterprises. However, there are certain indirect methods of investing in MLPs and avoiding the tax complications. The MLP Kinder Morgan Energy Partners (KMP) also has a counterpart called Kinder Morgan Management (KMR) that holds units of KMP and whose quarterly payout is treated like a regular dividend instead of a partnership distribution. Another alternative is closed-end funds like Kayne Anderson MLP (KYN) and BlackRock Global Energy and Resources Trust (BGR). KYN is currently trading at a 15.22% premium to net asset value (NAV) and a yield of 9.17%. In contrast BGR is trading at a 13.16% discount to NAV and a yield of 8.61%.

Most MLPs tend to be concentrated in the energy sector but there are always exceptions such as the private equity firms The Blackstone Group (BX) and Fortress Investment Group (FIG), which also happen to be set up as MLPs.