What Are the Advantages of Trading in Master Limited Partnerships?


Quick Answer

The advantages of master limited partnerships, or MLPs, include higher tax benefits and yields, notes Investopedia. Investors receive relatively high earnings compared to what they pay as taxes, making it easy easier to reduce their tax burden.

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Full Answer

MLPs are public corporations that mostly deal with natural resources, commodities and real estates, explains Investopedia. Unlike most companies, MLPs don't face double taxation, which entitles them to low costs of capital. At the company level, there is no taxation. Instead, the cash incomes pass to shareholders for taxation. In contrast to dividends, the cash distributions are not subject to taxes when shareholders receive them.

MLPs have a higher distributable cash flow than income tax due to natural resources and storage companies' notable depreciation and other tax deductions, according to Investopedia. Only 10 to 20 percent of the cash distribution, which is the net income in this case, undergoes taxation. Each holder receives a K-1 statement annually, which details information on the share of his income. The other 80 to 90 percent is seen as a return of capital, which is subtracted from the initial cost of investment.

In estate planning, MLP investors can increase their current income and still defer on their taxes, explains Investopedia. When the investor dies, the beneficiary acquires the investment, but the return on capital is set to the current market price, which reduces any accumulated taxes to zero.

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