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Individual Tax: Master Limited Partnerships and K-1 Filing

By February 23, 2017No Comments

Master Limited Partnerships (MLP) are a type of business that trades ownership units without incorporating. Units are often publicly trade through brokerage accounts, and to the retail investor, the units look and trade like shares of stock. While the holder of a stock share is an owner of the company, a holder of a MLP ownership unit is a partner. This technical distinction has tax implications.

In an incorporated entity, taxes are paid by the corporation, and then paid a second time by share holders when they receive dividends from the earnings of the corporation. By contrast, a MLP does not pay taxes because all profits are directly distributed to unit owners.

The ease of purchasing MLP ownership units may encourage investors to purchase units before understanding the full implications, including filing a K-1 form with taxes. The K-1 provides information on all types of gain and loss of the venture and proportions them to individual partners. These different types of gains and losses are ultimately entered in several other tax forms.

In addition to the complexity of the K-1, there is a history of issuers providing the forms late in the tax preparation season. If a refund is anticipated, this will likely mean a frustrating delay.

The decision to buy MLP ownership units unavoidably introduces a new complexity into tax preparation. Investors should understand this and weigh it against the investment benefit for their situation.  A tax professional can make the use of this investment vehicle easier. Please contact us for more detail or help with K-1 submittals.