Master Limited Partnerships (MLPs) and taxes

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MakingBacon
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Master Limited Partnerships (MLPs) and taxes

Post by MakingBacon »

I purchased shares of an LP for the first time this year. I've never owned an LP before, but I was attracted by the distribution which is obviously a lot higher than the typical stock dividend, so I decided to test the waters by purchasing some units of Energy Transfer (ET).

Anyways, I was just wondering if someone who is familiar with MLPs can explain (in layman's terms) how the taxation is different. I know I'll get a K-1 form for each LP I own, but beyond that I'm not sure what to expect. From what I've read, it seems the cash distributions from an LP are higher than the amount that's taxed? What potential negatives do I need to be aware of?
123
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Re: Master Limited Partnerships (MLPs) and taxes

Post by 123 »

The most consistent issue with partnerships is delays in receipt of the K-1 which will delay preparation of your tax return. Get used to filing for extensions. Consider getting used to revised K-1's and the need to file amended returns. That aggravation keeps many from dealing with MLPs.

You can also get taxed on income the MLP earns but doesn't distribute. It's good to keep track of the content of distributions you receive. Some people think they're getting income when it can turns that a share of the distribution is their own equity. Losses in the MLP can give you tax write-offs but diminish your equity, there ain't no free lunch. A good chance you'll get a great tax write-off from the investment, many of them go worthless. YMMV
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Abe
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Re: Master Limited Partnerships (MLPs) and taxes

Post by Abe »

123 wrote: Tue Aug 04, 2020 12:30 pm The most consistent issue with partnerships is delays in receipt of the K-1 which will delay preparation of your tax return. Get used to filing for extensions. Consider getting used to revised K-1's and the need to file amended returns. That aggravation keeps many from dealing with MLPs.
This plus they are subject to recapture when you sell them similar to recapture when depreciating real estate.
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Newaygo
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Re: Master Limited Partnerships (MLPs) and taxes

Post by Newaygo »

I got rid of all my MLP's because they were a tax reporting nuisance:
  • The K-1's would arrive around April 15 or after. Bad timing...
  • The tax reporting could get complex. An MLP may have underlying investments in MLP's which takes the complexity to a new high.
  • The tax software I used at the time was not much help. You had to read the tax code to have confidence.
  • Box 20 codes on the K-1 will drive you crazy.
  • When you sell you have to re-capture DDAR in ordinary income with the offet going to capital gains or losses. As a result, from a tax planning basis you would only knew this when you got the final K-1.
  • Do not buy them for an IRA or you can end up paying taxes if UTBI is greater than $1,000
Having said this I have friends who like MLP's but I found them a waste of time. Especially, if you have your tax return ready to file except that you are waiting on the MLP K-1.
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onthecusp
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Re: Master Limited Partnerships (MLPs) and taxes

Post by onthecusp »

The tax complications are real. The tax advantages for which one might put up with them is the opportunity for tax deferral in a taxable account. For the most part, distributions from MLP are not taxed when they are paid. The tax is paid (mostly) as a change in basis when the units are sold. This might be an advantage if your tax situation changes and you are in a lower bracket when you sell. Or your heir(s) receive a step up in basis and sell them tax free right after you pass.

Mostly, unless you have a lot of money in them, and a CPA advising you on the issues, the hassles are not worth the issues. ET is probably up today, you could sell at a small profit and put this behind you.

I say this as someone who owns some MLPs, acquired through work as compensation, and would like to sell them to you, a few years from now when my tax situation changes.
Hockey10
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Re: Master Limited Partnerships (MLPs) and taxes

Post by Hockey10 »

123 wrote: Tue Aug 04, 2020 12:30 pm The most consistent issue with partnerships is delays in receipt of the K-1 which will delay preparation of your tax return. Get used to filing for extensions. Consider getting used to revised K-1's and the need to file amended returns. That aggravation keeps many from dealing with MLPs.
This was exactly my experience with owning an MLP. I sold it to simplify my tax return. I would never buy another one.
illumination
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Re: Master Limited Partnerships (MLPs) and taxes

Post by illumination »

Just another vote here not to invest in them, no matter the industry. I exited because of all of my tax complications, they even screwed up my K-1 one year and it was an absolute mess to get straightened out.

Also, I got dinged with UBTI in a Roth account when I sold. Look into that wrinkle, if it exceeds a $1000 in a year, it becomes a problem in your retirement accounts. It was a modest amount, but seeing tax come out of your Roth IRA just hurts. :oops: I wasn't as well educated on them as I am now.

Fortunately, I exited all these positions well before the bottom really fell out of the energy markets and went with a more Boglehead approach. :sharebeer

I do think in a "speculative" sense, this part of the market is deeply undervalued (Midstream MLPs) but I would buy a fund like AMLP to play it if you are dead set on it. It has a high expense ratio, but you're not dealing with K-1s and you get better company diversification as these companies can easily go bust with their debt load. I think it's a fair tradeoff to pay that expense ratio.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by Katietsu »

Another vote that says that if you are asking this question then you probably should not be investing in them.
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onthecusp
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Re: Master Limited Partnerships (MLPs) and taxes

Post by onthecusp »

illumination wrote: Tue Aug 04, 2020 7:22 pm Just another vote here not to invest in them, no matter the industry. I exited because of all of my tax complications, they even screwed up my K-1 one year and it was an absolute mess to get straightened out.

Also, I got dinged with UBTI in a Roth account when I sold. Look into that wrinkle, if it exceeds a $1000 in a year, it becomes a problem in your retirement accounts. It was a modest amount, but seeing tax come out of your Roth IRA just hurts. :oops: I wasn't as well educated on them as I am now.

Fortunately, I exited all these positions well before the bottom really fell out of the energy markets and went with a more Boglehead approach. :sharebeer

I do think in a "speculative" sense, this part of the market is deeply undervalued (Midstream MLPs) but I would buy a fund like AMLP to play it if you are dead set on it. It has a high expense ratio, but you're not dealing with K-1s and you get better company diversification as these companies can easily go bust with their debt load. I think it's a fair tradeoff to pay that expense ratio.
If you want that individual stock value midstream tilt you can get it with midstream corporations. Some are former MLPs that converted to the corporate structure others started out that way. Same business different accounting and ownership rights, much friendlier in retirement accounts. None of this stuff is very boglehead though. Adding complication without an insider advantage.
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MakingBacon
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Re: Master Limited Partnerships (MLPs) and taxes

Post by MakingBacon »

Thank you to everyone who chimed in. It sounds like these can be a real nightmare come tax season.

I'm going to keep my units of ET for the time being because my cost basis is higher than the current price. However, hearing about these negative experiences has made me decide to hold off on purchasing anymore LPs at least until I have a better understanding of them. Fwiw, I was looking at USA Compression Partners (USAC) and Sunoco (SUN).


illumination wrote: Tue Aug 04, 2020 7:22 pm I do think in a "speculative" sense, this part of the market is deeply undervalued (Midstream MLPs) but I would buy a fund like AMLP to play it if you are dead set on it. It has a high expense ratio, but you're not dealing with K-1s and you get better company diversification as these companies can easily go bust with their debt load. I think it's a fair tradeoff to pay that expense ratio.
I took a peek at AMLP, but it doesn't look like a very good investment to be honest.
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onthecusp
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Re: Master Limited Partnerships (MLPs) and taxes

Post by onthecusp »

Just as another example of the complications you get into with MLPs.

USAC is seen as a pretty good business for now. ET owns a good size chunk of USAC so you already own some through your ownership of ET. I don't know what has happened since, but in 2018 when ET contributed some compression assets and got ownership of USAC units in return, ET also took on the "General Partner" of USAC. The relationship of a General Partner to the Master Limited Partnership is exactly as contractually defined for each such arrangement with more or less $ (incentive distribution rights or IDR) going to the GP along with murkier aspects of direction and control. My impression is that ET gave up the GP IDR$ in exchange for more ordinary units. But I have no idea what control is exerted.

I know even less about SUN, but I do know ET owns some of them too. And I agree with you on AMLP.

So, taking on two more K-1s may provide less diversification than you think. I may or may not buy more ET or the other MLP I still own, but I'm not taking on any additional k-1s.
123
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Re: Master Limited Partnerships (MLPs) and taxes

Post by 123 »

Even if you end up unhappy with your MLPs you can find comfort in the fact that the financial adviser that sold them to you was happy you bought them.
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onthecusp
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Re: Master Limited Partnerships (MLPs) and taxes

Post by onthecusp »

123 wrote: Wed Aug 05, 2020 1:53 pm Even if you end up unhappy with your MLPs you can find comfort in the fact that the financial adviser that sold them to you was happy you bought them.
No FA involved here. I make my own mistakes! :sharebeer
And although I am not unhappy with them they do complicate my life.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by Miriam2 »

illumination wrote: . . . Also, I got dinged with UBTI in a Roth account when I sold. Look into that wrinkle, if it exceeds a $1000 in a year, it becomes a problem in your retirement accounts. It was a modest amount, but seeing tax come out of your Roth IRA just hurts. :oops: I wasn't as well educated on them as I am now. . . .
Could someone please explain, in a nutshell 8-) , what this UBTI dinging is if one holds an MLP in an IRA?
John Bogle, "The Twelve Pillars of Wisdom" - Pillar 3: Time Marches On. Time dramatically enhances capital accumulation as the magic of compounding accelerates.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by Robert20 »

Miriam2 wrote: Wed Aug 05, 2020 5:02 pm
illumination wrote: . . . Also, I got dinged with UBTI in a Roth account when I sold. Look into that wrinkle, if it exceeds a $1000 in a year, it becomes a problem in your retirement accounts. It was a modest amount, but seeing tax come out of your Roth IRA just hurts. :oops: I wasn't as well educated on them as I am now. . . .
Could someone please explain, in a nutshell 8-) , what this UBTI dinging is if one holds an MLP in an IRA?
Its most complicated than I thought. Good that I sold all MLPs in my Roth earlier and moved to just 3 funds portfolio.. Life is very simple now .. Many thanks to this forum/BH.

https://www.investopedia.com/ask/answer ... th-ira.asp
Miriam2
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Re: Master Limited Partnerships (MLPs) and taxes

Post by Miriam2 »

Robert20 wrote: Its more complicated than I thought. Good that I sold all MLPs in my Roth earlier and moved to just 3 funds portfolio.. Life is very simple now .. Many thanks to this forum/BH.

https://www.investopedia.com/ask/answer ... th-ira.asp
Thank you Robert20. We actually contacted a financial advisor several years ago who wanted our business and was emphatic that using MLPs in my upcoming Rollover IRA would be excellent diversification for the 23-fund portfolio he planned for us :shock: Fortunately, sounded wacky and we told him he was nuts, we're staying at Vanguard.
John Bogle, "The Twelve Pillars of Wisdom" - Pillar 3: Time Marches On. Time dramatically enhances capital accumulation as the magic of compounding accelerates.
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Rob5TCP
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Re: Master Limited Partnerships (MLPs) and taxes

Post by Rob5TCP »

I bought a small amount of CNXM Midstream Partners (yes a MLP)
Since the total amount I own is only a couple of thousand
(and it's up about 40+% since I bough it)
would I have to deal with a K1 when I sell.
It's in my Roth.
Had I know all the potential headaches a MLP is I would not have bought it.
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MakingBacon
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Re: Master Limited Partnerships (MLPs) and taxes

Post by MakingBacon »

onthecusp wrote: Wed Aug 05, 2020 1:50 pm Just as another example of the complications you get into with MLPs.

USAC is seen as a pretty good business for now. ET owns a good size chunk of USAC so you already own some through your ownership of ET. I don't know what has happened since, but in 2018 when ET contributed some compression assets and got ownership of USAC units in return, ET also took on the "General Partner" of USAC. The relationship of a General Partner to the Master Limited Partnership is exactly as contractually defined for each such arrangement with more or less $ (incentive distribution rights or IDR) going to the GP along with murkier aspects of direction and control. My impression is that ET gave up the GP IDR$ in exchange for more ordinary units. But I have no idea what control is exerted.

I know even less about SUN, but I do know ET owns some of them too. And I agree with you on AMLP.

So, taking on two more K-1s may provide less diversification than you think. I may or may not buy more ET or the other MLP I still own, but I'm not taking on any additional k-1s.
Yeah, I'm already aware of the connections between Energy Transfer and USA Compression & Sunoco. It's not diversification I'm after so much as those juicy distributions. At $2.10 per share for USAC and $3.30 for SUN, along with a very consistent payout history, they're pretty hard to ignore at their current prices even with the headaches of the extra paperwork.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by JD Leonard »

Have you dealt with the paperwork yet? Those K-1s can be really intense. Consider selling this year to avoid avoidable pain (that from future tax years).
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sd323232
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Re: Master Limited Partnerships (MLPs) and taxes

Post by sd323232 »

i dont understand the hate for MLPs, this is 2020, K-1 are electronic now, and literally take 5 mins to input into turbo tax.

i understand if people quit MLPs in 2000s, but it alot easier to do taxes nowdays.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by rossington »

MakingBacon wrote: Thu Aug 06, 2020 1:24 am
onthecusp wrote: Wed Aug 05, 2020 1:50 pm Just as another example of the complications you get into with MLPs.

USAC is seen as a pretty good business for now. ET owns a good size chunk of USAC so you already own some through your ownership of ET. I don't know what has happened since, but in 2018 when ET contributed some compression assets and got ownership of USAC units in return, ET also took on the "General Partner" of USAC. The relationship of a General Partner to the Master Limited Partnership is exactly as contractually defined for each such arrangement with more or less $ (incentive distribution rights or IDR) going to the GP along with murkier aspects of direction and control. My impression is that ET gave up the GP IDR$ in exchange for more ordinary units. But I have no idea what control is exerted.

I know even less about SUN, but I do know ET owns some of them too. And I agree with you on AMLP.

So, taking on two more K-1s may provide less diversification than you think. I may or may not buy more ET or the other MLP I still own, but I'm not taking on any additional k-1s.
Yeah, I'm already aware of the connections between Energy Transfer and USA Compression & Sunoco. It's not diversification I'm after so much as those juicy distributions. At $2.10 per share for USAC and $3.30 for SUN, along with a very consistent payout history, they're pretty hard to ignore at their current prices even with the headaches of the extra paperwork.
If you put the MLP in an IRA you can eliminate one headache...the need to pay your accountant each year to deal with the k-1. You will get the distributions tax free if they don't exceed 1k annually. MLP's as a rule try to keep UBTI under this limit by intentionally offsetting ordinary income with expenses...the trick is to make sure the one's you own/buy do this. (Check out EPD).
If you hold long term in an IRA the real pitfall is since your basis is reduced by the offsetting distributions as a return of capital when your basis reaches zero any further distributions are taxable as both ordinary income and capital gains. So it is when/if you sell in the IRA that negative basis income is added to any capital gain you may have and taxed as UBTI at estate tax rates (which are extremely high) beyond the 1k deduction. If the MLP retains it's tax deferred status for the rest of your life then your distributions will be tax free. If not(which is the worst case scenario) or if you decide to sell it you could possibly owe some hefty taxes out of your IRA.

So the question is which is more cost effective long term to benefit from the distribution income...a taxable or non-taxable account?
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
not4me
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Re: Master Limited Partnerships (MLPs) and taxes

Post by not4me »

MakingBacon wrote: Wed Aug 05, 2020 12:08 am
I purchased shares of an LP for the first time this year.



because my cost basis is higher than the current price.
Quoting pertinent parts of 2 of your posts that somewhat raised a red flag. Apologies up front if you were trying to keep it simple for discussion purposes. You are right to focus on basis, but I would question whether you know your current basis precisely at this point. Most MLPs are able to distribute more cash than they show as income that year because of things such as depreciation. This has the effect of deferring the tax, but it does alter the basis. However, I'm not sure you know until after year end how the distributions are classified to know the impact on basis.

Are you familiar with the recapture process? If not, you need to be since the calculation of gain/loss when you sell is different from assets such as common stock.

I think MLPs make sense for some investors; mainly those who have similar interests as the general partner. I looked into this a few years back & couldn't get the numbers to work in my specific case. Then some potential regulatory changes were proposed that would adversely affect them & I stopped looking. That was before the 2018 TCJA which affected the taxation at federal level. So, perhaps things have changed that I'm overlooking. Previously, some of the tax advantages of MLPs could trigger AMT & that may be less of a concern now?

BTW, remember that is currently due to expire at the end of 2025.

I didn't notice anyone mention how this type of income affects QBI deduction, but that might also affect you.
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MakingBacon
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Re: Master Limited Partnerships (MLPs) and taxes

Post by MakingBacon »

sd323232 wrote: Thu Aug 06, 2020 3:41 am i dont understand the hate for MLPs, this is 2020, K-1 are electronic now, and literally take 5 mins to input into turbo tax.

i understand if people quit MLPs in 2000s, but it alot easier to do taxes nowdays.
Yeah, I'm thinking most of the people who are making a big deal out of the K-1s probably didn't own enough of the MLP to make it worth their while. They're probably right that they aren't worth it if we're only talking about a few hundred shares.
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MakingBacon
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Re: Master Limited Partnerships (MLPs) and taxes

Post by MakingBacon »

rossington wrote: Thu Aug 06, 2020 3:51 am If you put the MLP in an IRA you can eliminate one headache...the need to pay your accountant each year to deal with the k-1. You will get the distributions tax free if they don't exceed 1k annually. MLP's as a rule try to keep UBTI under this limit by intentionally offsetting ordinary income with expenses...the trick is to make sure the one's you own/buy do this. (Check out EPD).
If you hold long term in an IRA the real pitfall is since your basis is reduced by the offsetting distributions as a return of capital when your basis reaches zero any further distributions are taxable as both ordinary income and capital gains. So it is when/if you sell in the IRA that negative basis income is added to any capital gain you may have and taxed as UBTI at estate tax rates (which are extremely high) beyond the 1k deduction. If the MLP retains it's tax deferred status for the rest of your life then your distributions will be tax free. If not(which is the worst case scenario) or if you decide to sell it you could possibly owe some hefty taxes out of your IRA.

So the question is which is more cost effective long term to benefit from the distribution income...a taxable or non-taxable account?
Thanks, but I'd rather not take the chance of making things even more complicated by putting MLPs in a retirement account. Besides, my distributions will almost certainly exceed 1K annually.
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MakingBacon
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Re: Master Limited Partnerships (MLPs) and taxes

Post by MakingBacon »

not4me wrote: Thu Aug 06, 2020 9:51 amAre you familiar with the recapture process? If not, you need to be since the calculation of gain/loss when you sell is different from assets such as common stock.
I'm not too familiar with recapture. Do I understand correctly that the non-taxed portions of the distributions I receive actually increase the cost basis of the shares?
petulant
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Re: Master Limited Partnerships (MLPs) and taxes

Post by petulant »

MakingBacon wrote: Thu Aug 06, 2020 12:55 pm
not4me wrote: Thu Aug 06, 2020 9:51 amAre you familiar with the recapture process? If not, you need to be since the calculation of gain/loss when you sell is different from assets such as common stock.
I'm not too familiar with recapture. Do I understand correctly that the non-taxed portions of the distributions I receive actually increase the cost basis of the shares?
They DECREASE the cost basis, meaning in the future if you sell you have INCREASED tax liability. The true long-term expected return of an MLP unit can therefore be LOWER than the distribution yield.

It should be clear at this point for astute investors that the true economic return of an investment can be wildly different from its cash flow to the investor: a large, growing technology company can be generating significant economic returns but not paying dividends, while an investment with a high payout can just be returning your capital!

The last time I tried to make a total return calculator for MLPs, I found that their expected returns were on par with lower-beta stocks and therefore were not a good idea because of 1) complexity, 2) reduced flexibility for tax strategies, and 3) sector concentration.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by not4me »

MakingBacon wrote: Thu Aug 06, 2020 12:55 pm
not4me wrote: Thu Aug 06, 2020 9:51 amAre you familiar with the recapture process? If not, you need to be since the calculation of gain/loss when you sell is different from assets such as common stock.
I'm not too familiar with recapture. Do I understand correctly that the non-taxed portions of the distributions I receive actually increase the cost basis of the shares?
I did a quick internet scan & the following url popped up. I only skimmed it, but thought it might be of use to you:
https://content.rwbaird.com/RWB/Content ... s-FAQs.pdf

Hope this isn't a problem with board policy as it isn't intended to. I'm sure there are other resources out there as well and your individual situation may have other considerations. You'll note the mlp interacts with other tax matters. Hard to be comprehensive on such a matter
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Re: Master Limited Partnerships (MLPs) and taxes

Post by rossington »

MakingBacon wrote: Thu Aug 06, 2020 12:55 pm
not4me wrote: Thu Aug 06, 2020 9:51 amAre you familiar with the recapture process? If not, you need to be since the calculation of gain/loss when you sell is different from assets such as common stock.
I'm not too familiar with recapture. Do I understand correctly that the non-taxed portions of the distributions I receive actually increase the cost basis of the shares?
Definitely examine the link below:
not4me wrote: Thu Aug 06, 2020 2:11 pm I did a quick internet scan & the following url popped up. I only skimmed it, but thought it might be of use to you:
https://content.rwbaird.com/RWB/Content ... s-FAQs.pdf
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
mkpainter
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Re: Master Limited Partnerships (MLPs) and taxes

Post by mkpainter »

Newaygo wrote: Tue Aug 04, 2020 12:38 pm I got rid of all my MLP's because they were a tax reporting nuisance:
  • The K-1's would arrive around April 15 or after. Bad timing...
  • The tax reporting could get complex. An MLP may have underlying investments in MLP's which takes the complexity to a new high.
  • The tax software I used at the time was not much help. You had to read the tax code to have confidence.
  • Box 20 codes on the K-1 will drive you crazy.
  • When you sell you have to re-capture DDAR in ordinary income with the offet going to capital gains or losses. As a result, from a tax planning basis you would only knew this when you got the final K-1.
  • Do not buy them for an IRA or you can end up paying taxes if UTBI is greater than $1,000
Having said this I have friends who like MLP's but I found them a waste of time. Especially, if you have your tax return ready to file except that you are waiting on the MLP K-1.
Ditto. I owned ETP and after the first tax season I was going to get rid of it but it dropped in price. It recovered about 8 months later and I dropped it to not have to deal with the K-1s again. Well, except for that final year. PITA.
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Rob5TCP
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Re: Master Limited Partnerships (MLPs) and taxes

Post by Rob5TCP »

My MLP has a high % payout; but since I only bought about $1000 worth, to start (now worth about 2k -- luck, just happened to buy while it was down) will give about $150-$200 per year in dividends. This is in my IRA Roth. Do I need to worry about K1's at all. What about when I sell the stock.
Will there be any issues than?
alfaspider
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Re: Master Limited Partnerships (MLPs) and taxes

Post by alfaspider »

MLPs tend to make the most sense for older investors who intend to pass the interests to their shares. They distributions while they are alive and the stepped up basis at death avoids the recapture for the heirs if they sell upon inheriting them.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by rossington »

Rob5TCP wrote: Fri Aug 07, 2020 8:35 am My MLP has a high % payout; but since I only bought about $1000 worth, to start (now worth about 2k -- luck, just happened to buy while it was down) will give about $150-$200 per year in dividends. This is in my IRA Roth. Do I need to worry about K1's at all. What about when I sell the stock.
Will there be any issues than?
Read the links provided above by Robert20 and not4me. They are not dividends but rather "distributions". As long as yours don't exceed 1k you won't be subject to UBIT which is what you don't want. When you sell it gets more complicated especially if you held the MLP for a long time and have recaptured your basis (or exceeded it) and the stock has appreciated in value. Many MLP's have links to where you can calculate where you approximately stand, check with their Investor Relations.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
adamthesmythe
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Re: Master Limited Partnerships (MLPs) and taxes

Post by adamthesmythe »

Mine was inherited. I'm glad it's gone. Maybe it's easy to do the taxes...but only if you can get the K-1 on time. Which didn't happen.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by pshonore »

rossington wrote: Fri Aug 07, 2020 1:02 pm
Rob5TCP wrote: Fri Aug 07, 2020 8:35 am My MLP has a high % payout; but since I only bought about $1000 worth, to start (now worth about 2k -- luck, just happened to buy while it was down) will give about $150-$200 per year in dividends. This is in my IRA Roth. Do I need to worry about K1's at all. What about when I sell the stock.
Will there be any issues than?
Read the links provided above by Robert20 and not4me. They are not dividends but rather "distributions". As long as yours don't exceed 1k you won't be subject to UBIT which is what you don't want. When you sell it gets more complicated especially if you held the MLP for a long time and have recaptured your basis (or exceeded it) and the stock has appreciated in value. Many MLP's have links to where you can calculate where you approximately stand, check with their Investor Relations.
That's not how UBTI works. Distributions have nothing to do with it. UBTI refers to the earnings in Box 1 of the K1 (usually negative for most MLPs.) However, upon sale, all the depreciation (which caused the negative numbers in Box 1) is recaptured and that is what puts you over the 1K limit. (The first 1K of UBTI is not taxed.) The IRA custodian is responsible for filing the 990T return and until a few years ago, most ignored it. The returns which can be complex, are usually prepared by PWC - the same folks who produce the K1 form.

In a taxable account, the taxes are fairly straightforward. Distributions and negative earnings in Box 1 reduce your basis; positive Box 1 numbers and other portfolio income passed through like interest and dividends increase it. Positive Box 1 numbers are taxable when received unless you have negative numbers from previous years to offset them.

When you sell, your adjusted basis is subtracted from sale proceeds to get total gain. The MLP will tell you how much of that total gain is considered ordinary income resulting from recapture and goes on Form 4797. The balance is cap gain. If the ordinary income exceeds total gain, the excess would be a cap loss. I've saved the best for last. All the negative numbers in Box 1 that you've accumulated over the years (after netting with any positives) can be taken as a loss on Schedule E when you dispose of your entire position. That's just the tip of the iceberg but there can be several other complications. The net result is the distributions in effect get taxed when you sell, some as ordinary income, some as cap gain/loss. One of the biggest problems is the average tax preparer has little knowledge of this. Turbo Tax handles it quite well if you push the right buttons. Holding in an IRA just adds to the complexity.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by rossington »

pshonore wrote: Fri Aug 07, 2020 6:38 pm
rossington wrote: Fri Aug 07, 2020 1:02 pm
Rob5TCP wrote: Fri Aug 07, 2020 8:35 am My MLP has a high % payout; but since I only bought about $1000 worth, to start (now worth about 2k -- luck, just happened to buy while it was down) will give about $150-$200 per year in dividends. This is in my IRA Roth. Do I need to worry about K1's at all. What about when I sell the stock.
Will there be any issues than?
Read the links provided above by Robert20 and not4me. They are not dividends but rather "distributions". As long as yours don't exceed 1k you won't be subject to UBIT which is what you don't want. When you sell it gets more complicated especially if you held the MLP for a long time and have recaptured your basis (or exceeded it) and the stock has appreciated in value. Many MLP's have links to where you can calculate where you approximately stand, check with their Investor Relations.
That's not how UBTI works. Distributions have nothing to do with it. UBTI refers to the earnings in Box 1 of the K1 (usually negative for most MLPs.) However, upon sale, all the depreciation (which caused the negative numbers in Box 1) is recaptured and that is what puts you over the 1K limit. (The first 1K of UBTI is not taxed.) The IRA custodian is responsible for filing the 990T return and until a few years ago, most ignored it. The returns which can be complex, are usually prepared by PWC - the same folks who produce the K1 form.

In a taxable account, the taxes are fairly straightforward. Distributions and negative earnings in Box 1 reduce your basis; positive Box 1 numbers and other portfolio income passed through like interest and dividends increase it. Positive Box 1 numbers are taxable when received unless you have negative numbers from previous years to offset them.

When you sell, your adjusted basis is subtracted from sale proceeds to get total gain. The MLP will tell you how much of that total gain is considered ordinary income resulting from recapture and goes on Form 4797. The balance is cap gain. If the ordinary income exceeds total gain, the excess would be a cap loss. I've saved the best for last. All the negative numbers in Box 1 that you've accumulated over the years (after netting with any positives) can be taken as a loss on Schedule E when you dispose of your entire position. That's just the tip of the iceberg but there can be several other complications. The net result is the distributions in effect get taxed when you sell, some as ordinary income, some as cap gain/loss. One of the biggest problems is the average tax preparer has little knowledge of this. Turbo Tax handles it quite well if you push the right buttons. Holding in an IRA just adds to the complexity.
(I am quoting your comments below):
Distributions have nothing to do with it.
My interpretation has been:

From Investopedia:
"Because the shares of an MLP represent an interest in the partnership, any income they produce is considered a partnership distribution and is taxable as such.  A company that issues MLP shares doesn't pay corporate income tax, but instead distributes income to its partners or unitholders. This becomes taxable income to the shareholder.When you hold MLP shares within a retirement account, such as a Roth IRA, this income—if it totals $1,000 or more—is considered unrelated business taxable income, or UBTI. That makes it subject to immediate tax, unlike most other investments you might hold in an IRA, where your earnings are usually tax-deferred or, in the case of Roth IRAs, tax-free." https://www.investopedia.com/ask/answer ... th-ira.asp
The net result is the distributions in effect get taxed when you sell, some as ordinary income, some as cap gain/loss.
"What is the second scenario
where UBIT can lead to a tax in
a retirement account?"....

"The second scenario occurs upon the sale of the MLP. When an MLP is sold, the gain itself is subject to
UBIT, although the treatment is a bit unique. Recall that a sale of an MLP results in both ordinary
income (from recapture) and capital gain (or loss). The ordinary income recognized upon a sale is
subject to UBIT." https://content.rwbaird.com/RWB/Content ... -FAQs.pdf

Agreed.
One of the biggest problems is the average tax preparer has little knowledge of this.
I have found that to be true as well.
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EdNorton
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Re: Master Limited Partnerships (MLPs) and taxes

Post by EdNorton »

I agree with pshonore, the cash distributions have no bearing on the UBTI calculation. Ordinary income is what triggers UBTI.

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Re: Master Limited Partnerships (MLPs) and taxes

Post by not4me »

Part of the info upthread has been at best only true sometimes & at worst wrong. I'd suggest anyone who owns, or is thinking of owning, a mlp & has not dealt with the taxes since tcja went into effect, look past the thread for your specifics. A good starting point might be the tax info for your broker. For example, Fidelity has a page on UBTI that is mainly focused on IRA holdings. However, the FAQ portion has some info for non-IRA holders as well.

btw, I didn't notice this earlier, but may have overlooked it. I believe it is true that if the holding within the IRA results in tax on the UBTI, it is paid by the custodian using funds from the same IRA account. That is not a taxable distribution, but of course would lower the IRA amount.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by petulant »

The investopedia article is mixing up the MLP cash distributions with the taxable income based on its verbiage. The K-1 will show the actual partnership income allocated to the limited partner, and that is going to be much smaller than the cash distribution for a normal MLP. If the MLP costs $100 per share and generates a 10% cash distribution of $10 per year, the income allocated to the partner might end up being $1 or $2 for the year. (The MLP business is using accelerated depreciation to shield income from taxes, among other tricks.) That is the amount that triggers UBIT, effectively meaning a much larger amount can be held in an IRA than otherwise expected. However, this is still risky because 1) eventually the partner's basis will be reduced significantly due to passive and at-risk loss limitation rules, so the income shielding will flip and most of the cash distribution will then become taxable, and 2) even if the IRA sells before this happens, recapture will apply.

I wouldn't recommend anybody hold MLPs unless they are very familiar with partnership tax rules or is working with an advisor/accountant who is. I would also never recommend holding an MLP in an IRA, even a small position. (It's too risky going big and too small a part of the portfolio to matter and manage if small.)
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Re: Master Limited Partnerships (MLPs) and taxes

Post by rossington »

petulant wrote: Sat Aug 08, 2020 9:46 am The investopedia article is mixing up the MLP cash distributions with the taxable income based on its verbiage....
However, this is still risky because 1) eventually the partner's basis will be reduced significantly due to passive and at-risk loss limitation rules, so the income shielding will flip and most of the cash distribution will then become taxable, and 2) even if the IRA sells before this happens, recapture will apply.
+1
Once the basis has been reduced to zero (the article left that detail out) then what is actually distributed to the partner moving forward counts as taxable income in the IRA with the 1k exemption. UBIT is triggered beyond 1k. If one stays under the 1k with combined distributions and any additional partnership income they will be ok. The problem is that some MLP's will have high UBTI from operations in a given year increasing the risk of taxation in the IRA.
Also if the MLP loses it's tax deferred status (as in a merger or buyout) then the entire holding becomes taxable at that time.
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petulant
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Re: Master Limited Partnerships (MLPs) and taxes

Post by petulant »

rossington wrote: Sat Aug 08, 2020 12:54 pm
petulant wrote: Sat Aug 08, 2020 9:46 am The investopedia article is mixing up the MLP cash distributions with the taxable income based on its verbiage....
However, this is still risky because 1) eventually the partner's basis will be reduced significantly due to passive and at-risk loss limitation rules, so the income shielding will flip and most of the cash distribution will then become taxable, and 2) even if the IRA sells before this happens, recapture will apply.
+1
Once the basis has been reduced to zero (the article left that detail out) then what is actually distributed to the partner moving forward counts as taxable income in the IRA with the 1k exemption. UBIT is triggered beyond 1k. If one stays under the 1k with combined distributions and any additional partnership income they will be ok. The problem is that some MLP's will have high UBTI from operations in a given year increasing the risk of taxation in the IRA.
Also if the MLP loses it's tax deferred status (as in a merger or buyout) then the entire holding becomes taxable at that time.
Quite right about merger/buyout risk! They could also just convert to C corporation status. That's a big risk for some of the MLPs that are managed by an outside company, like ONEOK Partners had been in the past--eventually they get to the point where they want the whole thing brought back inside the mother company; or the management/large owners in an MLP decide they want the 21% corporate rate instead of constant pass-through. Should be less of a risk for the large ones where the MLP owns the GP, but even they could eventually opt for the 21% rate.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by not4me »

re: converting to C corp... I don't have any data, but I think many have already gone that route after tcja took effect. Part of the hesitancy now may be that those provisions are currently set to end after 2025. Another wave may -- or may not -- occur as resolution of that unfolds.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by petulant »

not4me wrote: Sat Aug 08, 2020 2:20 pm re: converting to C corp... I don't have any data, but I think many have already gone that route after tcja took effect. Part of the hesitancy now may be that those provisions are currently set to end after 2025. Another wave may -- or may not -- occur as resolution of that unfolds.
Yes, the initial wave of C corporation conversions should be done. However, the entire TCJA does not revert after 2025. Only specific provisions including the new personal income tax rates expire. The new C corporation income tax rates remain in place.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by dharrythomas »

A few years ago, I was looking at. Kinder Morgan MLP, the payouts and taxation benefits looked interesting. Before I bought, they forced the exchange of the MLP for common stock :shock: and shortly after cut their dividend and tanked the stock price. :twisted:

There may be a problem with the alignment of incentives between the General Partner and the Limited Partners.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by abuss368 »

MakingBacon wrote: Tue Aug 04, 2020 11:45 am I purchased shares of an LP for the first time this year. I've never owned an LP before, but I was attracted by the distribution which is obviously a lot higher than the typical stock dividend, so I decided to test the waters by purchasing some units of Energy Transfer (ET).

Anyways, I was just wondering if someone who is familiar with MLPs can explain (in layman's terms) how the taxation is different. I know I'll get a K-1 form for each LP I own, but beyond that I'm not sure what to expect. From what I've read, it seems the cash distributions from an LP are higher than the amount that's taxed? What potential negatives do I need to be aware of?
If you hold in an IRA you could have an unrelated business income tax issue. You could also have a multi state tax filing requirement in a taxable account. Why not simple buy Vanguard US and International High Dividend Yield?
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Re: Master Limited Partnerships (MLPs) and taxes

Post by pshonore »

rossington wrote: Sat Aug 08, 2020 12:54 pm
petulant wrote: Sat Aug 08, 2020 9:46 am The investopedia article is mixing up the MLP cash distributions with the taxable income based on its verbiage....
However, this is still risky because 1) eventually the partner's basis will be reduced significantly due to passive and at-risk loss limitation rules, so the income shielding will flip and most of the cash distribution will then become taxable, and 2) even if the IRA sells before this happens, recapture will apply.
+1
Once the basis has been reduced to zero (the article left that detail out) then what is actually distributed to the partner moving forward counts as taxable income in the IRA with the 1k exemption. UBIT is triggered beyond 1k. If one stays under the 1k with combined distributions and any additional partnership income they will be ok. The problem is that some MLP's will have high UBTI from operations in a given year increasing the risk of taxation in the IRA.
Also if the MLP loses it's tax deferred status (as in a merger or buyout) then the entire holding becomes taxable at that time.
There are really only two things that trigger UBTI; one is a positive number in Box 1 of the K1 and the other is recapture upon sale. Distributions are not considered UBTI. Unfortunately, the Investopedia article cited is incorrect. In a taxable account, distributions received after basis is below zero are taxed at cap gains rate but you also have to consider non-recourse liabilities which is too complex a subject for this discussion. Same for an IRA.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by rossington »

pshonore wrote: Sat Aug 08, 2020 9:46 pm There are really only two things that trigger UBTI; one is a positive number in Box 1 of the K1 and the other is recapture upon sale. Distributions are not considered UBTI. Unfortunately, the Investopedia article cited is incorrect. In a taxable account, distributions received after basis is below zero are taxed at cap gains rate but you also have to consider non-recourse liabilities which is too complex a subject for this discussion. Same for an IRA.
I don't want get in the weeds too much here, but this is where I am confused:
In an IRA, if your basis has exceeded zero and distributions are now considered income, once your distributions in a given year exceed 1k doesn't that trigger UBTI for that year?
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Re: Master Limited Partnerships (MLPs) and taxes

Post by pshonore »

rossington wrote: Sun Aug 09, 2020 2:50 pm
pshonore wrote: Sat Aug 08, 2020 9:46 pm There are really only two things that trigger UBTI; one is a positive number in Box 1 of the K1 and the other is recapture upon sale. Distributions are not considered UBTI. Unfortunately, the Investopedia article cited is incorrect. In a taxable account, distributions received after basis is below zero are taxed at cap gains rate but you also have to consider non-recourse liabilities which is too complex a subject for this discussion. Same for an IRA.
I don't want get in the weeds too much here, but this is where I am confused:
In an IRA, if your basis has exceeded zero and distributions are now considered income, once your distributions in a given year exceed 1k doesn't that trigger UBTI for that year?
Most forms of income are not taxable in an IRA - for example dividends, interest, royalties, cap gains, etc. I don't see any reference in the tax code to distributions being taxable (in an IRA). Remember UBTI means Unrelated Business taxable income, ie. Operating income of the LP (Box 1 of the K1 which is negative for most), not income to the MLP.

Here's a reference to non-recourse liabilities "providing basis":
https://www.dbbllc.com/newsletters/focu ... iabilities.

Most MLPs report non-recourse liabilities on the K1 in Part II Section K.
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Re: Master Limited Partnerships (MLPs) and taxes

Post by rossington »

pshonore wrote: Mon Aug 10, 2020 1:43 pm
rossington wrote: Sun Aug 09, 2020 2:50 pm
pshonore wrote: Sat Aug 08, 2020 9:46 pm There are really only two things that trigger UBTI; one is a positive number in Box 1 of the K1 and the other is recapture upon sale. Distributions are not considered UBTI. Unfortunately, the Investopedia article cited is incorrect. In a taxable account, distributions received after basis is below zero are taxed at cap gains rate but you also have to consider non-recourse liabilities which is too complex a subject for this discussion. Same for an IRA.
I don't want get in the weeds too much here, but this is where I am confused:
In an IRA, if your basis has exceeded zero and distributions are now considered income, once your distributions in a given year exceed 1k doesn't that trigger UBTI for that year?
Most forms of income are not taxable in an IRA - for example dividends, interest, royalties, cap gains, etc. I don't see any reference in the tax code to distributions being taxable (in an IRA). Remember UBTI means Unrelated Business taxable income, ie. Operating income of the LP (Box 1 of the K1 which is negative for most), not income to the MLP.

Here's a reference to non-recourse liabilities "providing basis":
https://www.dbbllc.com/newsletters/focu ... iabilities.

Most MLPs report non-recourse liabilities on the K1 in Part II Section K.
Thanks so much for the help.
Regarding the non-recourse liabilities, they increase one's tax basis (correct?).
As an example if one had negative 1.5k basis and non-recourse liabilities of 3k, then the adjusted basis would be 1.5k. Am I looking at this correctly?
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