Master limited partnership

🇺🇸

A master limited partnership (MLP) is a limited partnership that is publicly traded on a securities exchange. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.

The master limited partnership is actually a colloquial name for a subset of the group of entities called publicly traded partnerships (PTPs). PTPs issue publicly traded interests (called “units”) that are accessible to investors with a brokerage account.

However, PTPs are unincorporated entities under state law, like limited liability companies or limited partnerships, and are treated as partnerships for tax purposes. As partnerships, PTPs are able to pass through all income, gains, deductions, losses, and credits to investors, and they generally pay no entity-level taxes.

Characteristics
MLP units carry stock-like risk: The publicly traded units issued by MLPs —the predominant way investors gain exposure to them- represent the equity capital of a business, and as such, carry a level of risk similar to that of stock in a capital structure. In other words, MLP units are inherently riskier than bonds issued by the same company.

MLPs are concentrated in the energy sector: Most MLPs are energy-related businesses. This is a result of tax-related legislation.

Investing in MLPs
There are two ways to invest in MLPs:


 * Direct investment: Investors purchase units of one or more MLPs, thus becoming a partner in each business. A key advantage of direct investing is pass-through taxation. As partnerships, MLPs generally pay no corporate taxes; instead, they pass through net income and gains untaxed to investors, who then pay personal income tax on their share of these proceeds.
 * Indirect investment: Investing indirectly means gaining exposure to MLPs through investment vehicles that hold or track them. Such vehicles include closed-end funds, mutual funds, exchange-traded funds (ETFs), and exchange-traded notes (ETNs). In addition to diversification, key advantages these vehicles provide are that they eliminate the need to deal with Schedule K-1s and do not generate Unrelated Business Taxable Income (UBTI).

Taxation
MLPs require understanding of six tax topics:
 * 1) Flow-through accounting
 * 2) Tax basis
 * 3) Return of capital
 * 4) Passive loss rules
 * 5) Recapture
 * 6) Zero basis

An MLP’s tax pass-through status applies at both a federal and a state level. An MLP unitholder is responsible for paying state income taxes on the portion of income allocated to the unitholder for each individual state in which the MLP operates. For companies that have networks of pipelines reaching across America, this can mean a considerable number of additional filings for the investor. In most cases, however, unless the unitholder owns a large position, the share of allocated income is small and the unitholder may not have to file in some states due to minimum income limits. Additionally, some states, such as Texas and Wyoming, do not have state income taxes.

If an investor is looking to own an MLP in a tax-advantaged account such as an IRA, partnership income (not cash distributions) may be considered unrelated business taxable income (UBTI) and subject to unrelated business income tax (UBIT), if UBIT exceeds $1,000 in a year. The custodian of the IRA is responsible for filing IRS Form 990T and paying the taxes.

Tutorials

 * By Alerian MLP Index for Master Limited Partnerships:
 * MLP 101: This section is designed for people that are brand new to the MLP space or those that simply want a refresher.
 * MLP 201: This section of the MLP University is intended for people who have worked through MLP 101 or people who already have a solid understanding of the MLP asset class.
 * MLP 301: Think of this as a graduate level education in MLPs.
 * Primers, Presentations, and Other MLP Websites, from National Association of Publicly Traded Partnerships
 * Tax Guide To Master Limited Partnerships, William Baldwin, Forbes, December 2, 2010.

White papers

 * Kwon, David T.,User's guide to master limited partnerships, Vanguard Instititutional, June 17, 2014.