The Pitfalls and Payoff of MLPs | Summary and Q&A

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June 19, 2012
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The Motley Fool
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The Pitfalls and Payoff of MLPs

TL;DR

Master limited partnerships (MLPs) offer tax breaks for companies, but investors should be aware of the tax implications and reporting complexities.

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Key Insights

  • 🧔 MLPs offer tax advantages to companies, but investors bear the burden of taxes.
  • 💁 Reporting MLP income on tax forms can be more complex and may require professional assistance.
  • 🥹 Due to complicated rules, it is generally not recommended to hold MLPs in retirement accounts.
  • 💐 Investors can choose between individual MLP stocks or MLP-focused ETFs for exposure to MLPs.
  • ✋ MLPs often offer higher dividend yields compared to regular corporations due to tax advantages.
  • 🫢 MLPs primarily invest in natural resource-related sectors, such as oil and gas production.
  • 📛 MLPs can be identified by names containing "LP" or other indicators of partnership structure.

Questions & Answers

Q: How are MLPs different from regular corporations in terms of taxation?

Unlike regular corporations, MLPs do not pay corporate taxes. Instead, they pass through all income and tax responsibilities to their shareholders.

Q: What are the tax reporting complexities associated with MLP investments?

MLPs require shareholders to fill out special forms known as K1 forms, which can be more involved than reporting regular stock dividends. This may result in higher accounting fees.

Q: Can MLPs be held in retirement accounts like IRAs?

While it may be tempting to put MLPs in retirement accounts, complex rules govern MLPs and similar investments in these accounts. As a result, most people consider it inappropriate.

Q: How can investors gain exposure to MLPs?

Investors have multiple options, including buying stocks of individual MLPs listed on regular exchanges. Additionally, they can invest in MLP-focused ETFs that provide exposure to a variety of MLPs.

Summary & Key Takeaways

  • Master limited partnerships (MLPs) primarily invest in natural resource-related areas such as oil and gas production. They provide significant tax breaks for companies.

  • MLPs pass through all income and tax burdens to shareholders, which can lead to tax reporting complexities and potentially higher accountant fees.

  • Putting MLPs into retirement accounts, such as IRAs, is generally not advisable due to complicated rules governing MLPs in these accounts.

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