MLPs typically make quarterly cash distributions to limited partners, which are reported to each partner on a Form K-1 (instead of the Form 1099 used for corporate dividends). These cash distributions represent a proportionate portion of the Company`s distributable cash flows, which include not only income from MLP`s business activities, but also depreciation, exhaustion deductions, tax credits and other tax deductions. The K-1 shows each partner`s share of the profit, loss, deduction and tax credits for that tax year. Under the United States Code, a publicly traded partnership can only participate in certain types of business activities. Examples include companies that involve natural resources such as oil and transportation. Pursuant to Section 7704(b) of the Internal Revenue Code, a partnership is listed on a stock exchange if the partnership`s interests are listed on a stock exchange on an established securities market or are available for trading on a secondary or equivalent market. Once the corporation is active, the partners do not have to pay any income tax from state or federal corporations. A master limited partnership (MLP) developed in the 1980s – sometimes referred to as a limited partnership (TPP) – is typically a limited partnership that operates an active business. An MLP offers interest (called “shares”) that are traded in a similar way to shares on an established securities market or that are easily tradable on a secondary market or its essential equivalent (for more information, see the technical advice under “How does an MLP work?”).
When you acquire a stake in an MLP, you are technically more likely to become a shareholder than a shareholder. In this respect, it differs from a limited partnership. As mentioned earlier, an MLP usually has both a general partner and a limited partner. Most individual investors who buy shares of an MLP become limited partners; However, if the general partner is a publicly traded company, investors can buy shares of it, as they would with any other company. MLPs must register with the Securities and Exchange Commission and provide investors with a prospectus and other information. Shares of private limited partnerships often require a high initial investment. In contrast, widely used MLPs shares can be much more affordable for the average investor. Because MLP shares are traded on an established securities market or are easily tradable on a secondary market (or equivalent), they are more liquid than limited partnership shares. This is beneficial if you (for some reason) no longer want to be a partner or if you have an immediate need for money. The limited partners, in turn, receive distributions of MLP`s cash flows.
Sponsors do not participate in the commercial activities of an MLP. Although limited partners` shares are listed on the stock exchange, complementary partner shares are generally not. To qualify as a publicly traded partnership, 90% of the partnership`s income must come from “eligible” sources, as described in Title 26, Subtitle F, Chapter 79 of the Internal Revenue Code. Typically, these eligible sources include interest, dividends, property rents, and any gains from the sale and sale of real estate. The following example changes from a real investment to a TPP. Suppose an investor buys an interest in a limited partnership in a TPP for $8,600 in June 2010 and sells that interest in April 2012 for $9,915. If it were an investment in corporate shares, the investor would have a long-term capital gain of $1,315 and would expect to pay a maximum federal tax of $197.36, but the actual sale of interest is much more complicated, which would result in a total profit of $2,935, consisting of a decent income of $2,020 and a long-term capital gain of $915. Table 5 summarizes the annual flow activity in Annex K-1 and includes ordinary income (losses), interest income, losses under § 1231 and cash distributions (basic return). Investing in a TPP is as simple as buying shares of a company, but the similarity ends here.
The investor holds an interest in a partnership and is treated as a limited partner (or a member, in the case of a limited liability company (LLC)) of a flow-through corporation. There are many tax implications of investing in a partnership, some of which are not favorable, that investors should be aware of when investing in a TPP. Initially, the investor receives a K-1 list, a share of the affiliate`s income, deductions, credits, etc., which lists annual tax information, as opposed to a Form 1099-DIV, dividends and distributions received when investing in a company. In addition, due to the complexity of completing Schedule K-1, a taxpayer may not be able to receive it before or even after April 15, so the individual taxpayer will have to request an extension of their tax return. Master limited partnerships (MLPs) are listed limited partnerships listed on the national stock exchange. Most MLPs have general partners and many limited partners (investors). General partners manage day-to-day operations, while limited partners acquire shares of MLP and provide capital in exchange for cash distributions from the company`s business operations. Section 7704 of the IRC is the most important law that defines TPPs and how to tax them. This section dates back to 1987.
Under this section, publicly traded partnerships that receive at least 90% of their income from eligible sources do not pay tax at the entity level and follow a method of transmission to members for tax items. This way, they retain their partnership tax treatment if they reach that 90% threshold. Although the terms “MLP” and “PTP” are often used interchangeably, MLPs are technically a type of limited partnership that operates through subsidiaries and is not always publicly traded. While most TPPs are organized as MLPs, a TPP can be organized as a limited liability company that chooses to be taxed as a partnership. [1] The Internal Revenue Service requires a tax-exempt institution or account to pay taxes on income that is not directly related to the purpose for which it is considered tax-exempt. This provision of the Tax Code is called “unrelated business income tax” (UBIT). If an MLP passes on its income directly to the limited partners without being taxed at the partnership level, that income is considered to be directly earned by each individual partner. In a publicly traded partnership, shares are called units, which is why the shareholders of these companies are called shareholders. An MLP that is taxed as a partnership is treated by tax law in the same way as a private limited partnership. Limited partnerships and MLPs that are not taxed as a corporation are subject to the passive business loss limitation rules […].
