What is a Master Limited Partnership(MLP)? Have you ever heard of it? It is a form of limited partnership that is publicly traded. There are securities exchanges. Like for an instance you can consider AMZA. It is due to their listings on the stock exchanges that the MLPs are able to combine the tax benefits of a limited partnership. The infrastructure Capital Advisor is another such company with the liquidity of publicly traded securities. It can be said that some of the investors may be afraid towards partnerships in general. Hence, it becomes important to know MLPs are regulated by the SEC like the MLP ETF just like other publicly traded companies in the industry.
The structure of master limited partnership.
If you approach according to the National Association of Publicly Traded Partnerships you shall see that the MLP structure is mainly limited to companies receiving 90% or more of the told income from various sources. The sources include interest, dividends, real estate rents, and gain from the sale or disposition of real property. They also include income and gain from commodities or commodity futures and income and gain from mineral or natural resources activities whenever possible.
There are a few exceptions. The vast majority of MLPs operate in the energy industry. Thus, the locus on the energy industry stems from a section of the US tax code. The code indicates that the MLPs must operate in certain industries. These marked industries are mostly pertaining to the use of natural resources namely petroleum and natural gas extraction and transportation.
The tax drawbacks of the master limited partnership.
From the above statements it is clear that the tax advantages of the MLPs are very attractive. However, there are some drawbacks too. The main drawback of a MLP is that you are responsible for paying tax on your share of the partnership’s taxable income. This is absolutely not the case with cash distributions paid by the various MLPs. The cash distributions generally exceed the partnership’s taxable income. This may actually negate the total impact of the income that is tax subjected.