MLP (Master Limited Partnerships)

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copenhagen227
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MLP (Master Limited Partnerships)

Post by copenhagen227 »

Any general thoughts on investing in MLPs and on what their risk profile is? Recommendations on ones w steady income stream, low risk, liquidity, and diversified assets in real estate, infrastructure and energy? Thanks in advance
Sprucebark
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Re: MLP (Master Limited Partnerships)

Post by Sprucebark »

I think in theory they sound great. In reality I would never touch them. I had a coworker who invested in them and his taxes were very complicated. I believe they consider you an “owner” so all the tax nonsense that normally is taken care of at the corporate level flows through to you for you to take care of at your individual level on your individual tax return. Imagine for a moment that you are a “master limited partner” in a pipeline that runs through 13 states. You will get a tax form that looks like the Rosetta Stone and you’ll see all kinds of income and expense is attributed to those states (apportioned). I believe depreciation is on there too. I believe it flows through to you on a K-1 so now you just took a simple 1040 tax return and made it complicated. If you use TurboTax it will charge you more money. If you have to do state filings that makes it even worse.

I’d much prefer to not deal with any of that.
Valuethinker
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Re: MLP (Master Limited Partnerships)

Post by Valuethinker »

copenhagen227 wrote: Thu Jan 20, 2022 12:21 am Any general thoughts on investing in MLPs and on what their risk profile is? Recommendations on ones w steady income stream, low risk, liquidity, and diversified assets in real estate, infrastructure and energy? Thanks in advance
Real estate you can get that exposure via REITs?

As to the rest, the follies around some of the restructurings (Kinder Morgan?) which absolutely did not appear to be in the long term interests of non-insider shareholders...

There used to be a lot of threads here, not so many now. I am not a US taxpayer, but the consensus seemed to be (see post above) that the paperwork is fearsome.

Also those here who did make money investing tended to say that the "cheap" aspect of the investment was no longer the case. In the way that REITs in the late 90s were very cheap relative to fundamentals, but not so much now.

I don't know what Larry Swedroe has to say about them in his book(s) on alternative investments - that might be a useful guide.
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Re: MLP (Master Limited Partnerships)

Post by Valuethinker »

Sprucebark wrote: Thu Jan 20, 2022 12:36 am I think in theory they sound great. In reality I would never touch them. I had a coworker who invested in them and his taxes were very complicated. I believe they consider you an “owner” so all the tax nonsense that normally is taken care of at the corporate level flows through to you for you to take care of at your individual level on your individual tax return. Imagine for a moment that you are a “master limited partner” in a pipeline that runs through 13 states. You will get a tax form that looks like the Rosetta Stone and you’ll see all kinds of income and expense is attributed to those states (apportioned). I believe depreciation is on there too. I believe it flows through to you on a K-1 so now you just took a simple 1040 tax return and made it complicated. If you use TurboTax it will charge you more money. If you have to do state filings that makes it even worse.

I’d much prefer to not deal with any of that.
Good post.

To take on that kind of hassle one has to believe that the asset is genuinely cheap compared to other more readily investable assets like REITs. Surely there are listed US pipeline utilities w more ordinary capital structures?
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Re: MLP (Master Limited Partnerships)

Post by pshonore »

I've been an MLP investor for almost 20 years. While I would not recommend them to everyone, they can be a good source of tax deferred income. Most of the warnings about the dreaded K1 forms are an exaggeration. There are usually a half dozen numbers or so that go into your tax return which Turbo Tax handles nicely. And they do arrive usually in late February or early March.

The distributions are tax deferred as long as your basis exceeds zero. Basis equals purchase price plus items of income (if any). Distributions and operating losses reduce basis. Most MLPs have operating losses resulting from large amounts of depreciation. Your basis is actually tracked on the K1 and is available every year. Operating losses cannot be deducted until disposition of your entire interest or to offset any current operating income.

EPD (Enterprise Products Partners LP) is one of the largest and well most known MLPs. They're currently paying an 8.5 % distribution. The Alerian MLP Total Return Index (AMZX) has returned 10.2% annualized since 12/29/95

I will add that its usually not a good idea to buy an MLP in a tax-deferred account like a TIRA or a Roth. The reason is any operating earnings are considered UBTI (Unrelated Business Taxable Income) and your Custodian is required to prepare a 990 T tax return and use money from your IRA to pay that tax. Again while most MLPs do not generate operating income on an annual basis, they on sale since depreciation recapture is considered UBTI.

It can also be difficult to find a good tax preparer who understands MLPs if you don't prepare your own taxes.
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Re: MLP (Master Limited Partnerships)

Post by crefwatch »

I would also observe that MLP investors tend to focus on the yields. But there are significant risks that are not evident to novice investors. It's bad enough that petroleum industries have wide swings in product prices and production volumes. Or that non-renewable energy is increasingly subject to both bad press and declining markets. (I'm not talking just about tree-hugging, but about how the Tennessee Valley Authority, has gone from once mostly-coal to no coal at all (over a long period of time). This isn't about saving whales, rather, they care about how much it costs them to generate electricity!)

An MLP that, for example, operates pipelines is not only subject to market risks, asset company risks, and earthquakes, but unknown, future regulatory risks. And their business structure is not like a multinational that makes widgets, or imports widgets from China. It requires constant vigilance by the investor - YOU. I urge the OP to consider whether he is yield-chasing.
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Re: MLP (Master Limited Partnerships)

Post by abuss368 »

copenhagen227 wrote: Thu Jan 20, 2022 12:21 am Any general thoughts on investing in MLPs and on what their risk profile is? Recommendations on ones w steady income stream, low risk, liquidity, and diversified assets in real estate, infrastructure and energy? Thanks in advance
We invested (perhaps speculated is more appropriate) I traded individual stocks. I can recall having positions in multiple Teakay companies (energy shipping), Enterprise Product Partners (pipeline), Kinder Morgan (pipeline), Ameri Gas (propane distributor), and many others that I can no longer recall. I experienced the additional time and complexity to file our tax return. These entities are considered publicly traded partnerships and issue a Form K-1 for each tax year.

That said, there is an ETF (maybe iShares but not sure) that does not provide any Form K-1. However, I would considering passing and keep it simple with Total Stock funds which include the market weight of all publicly traded stocks.

Best.
Tony
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Re: MLP (Master Limited Partnerships)

Post by Yarlonkol12 »

abuss368 wrote: Thu Jan 20, 2022 8:52 pm
copenhagen227 wrote: Thu Jan 20, 2022 12:21 am Any general thoughts on investing in MLPs and on what their risk profile is? Recommendations on ones w steady income stream, low risk, liquidity, and diversified assets in real estate, infrastructure and energy? Thanks in advance
We invested (perhaps speculated is more appropriate) I traded individual stocks. I can recall having positions in multiple Teakay companies (energy shipping), Enterprise Product Partners (pipeline), Kinder Morgan (pipeline), Ameri Gas (propane distributor), and many others that I can no longer recall. I experienced the additional time and complexity to file our tax return. These entities are considered publicly traded partnerships and issue a Form K-1 for each tax year.

That said, there is an ETF (maybe iShares but not sure) that does not provide any Form K-1. However, I would considering passing and keep it simple with Total Stock funds which include the market weight of all publicly traded stocks.

Best.
Tony
Looks like I will be in a similar tax mess this year, on accident. Already sold out of these positions in 2021 but it looks like I will need to figure out how to file in almost every state if a penny or more of income was reported on the K-1s. My total dividend was only $3, but perhaps it will be a few pennies in a few states, will have to see what K-1 says. How did you manage all of the state tax filings?
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Re: MLP (Master Limited Partnerships)

Post by abuss368 »

Yarlonkol12 wrote: Fri Jan 21, 2022 7:36 am
abuss368 wrote: Thu Jan 20, 2022 8:52 pm
copenhagen227 wrote: Thu Jan 20, 2022 12:21 am Any general thoughts on investing in MLPs and on what their risk profile is? Recommendations on ones w steady income stream, low risk, liquidity, and diversified assets in real estate, infrastructure and energy? Thanks in advance
We invested (perhaps speculated is more appropriate) I traded individual stocks. I can recall having positions in multiple Teakay companies (energy shipping), Enterprise Product Partners (pipeline), Kinder Morgan (pipeline), Ameri Gas (propane distributor), and many others that I can no longer recall. I experienced the additional time and complexity to file our tax return. These entities are considered publicly traded partnerships and issue a Form K-1 for each tax year.

That said, there is an ETF (maybe iShares but not sure) that does not provide any Form K-1. However, I would considering passing and keep it simple with Total Stock funds which include the market weight of all publicly traded stocks.

Best.
Tony
Looks like I will be in a similar tax mess this year, on accident. Already sold out of these positions in 2021 but it looks like I will need to figure out how to file in almost every state if a penny or more of income was reported on the K-1s. My total dividend was only $3, but perhaps it will be a few pennies in a few states, will have to see what K-1 says. How did you manage all of the state tax filings?
Excellent point and one I wanted to mention on my post up thread. Typically if the income allocated to each state is above a minimum threshold, there may be a state tax filing requirement. Years ago, the income for us was minimal and we did not have any additional state reporting requirements.

For a $3 dividend, you are fine. Actually, that $3 could include return of capital and thus the true dividend is lower.

Another point to consider with MLP’s is Unrelated Business Taxable Income (UBTI). Essentially if these investments are placed in an IRA, and the UBTI is material enough, there is tax impact even if no distribution was processed from an IRA.

MLP’s have a lot of individual items to consider. Unfortunately many investors go into these investments without a complete understanding.

Best.
Tony
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Re: MLP (Master Limited Partnerships)

Post by illumination »

As someone who dabbled with them years ago, my advice is stay away. I dumped them purely because I hated the extra paperwork at tax time, they basically forced me every year to do a delayed tax return because they took so long to get the K-1's to me. I also had an issue where one messed up the K-1 and it was a headache getting it rectified. Decided I just wanted out of all of them. Ended up getting lucky as the energy sector cratered afterwards and it was mostly in that sector. It was never a major part of my portfolio.

In my taxable account, I was attracted to them because of the tax advantages, but I decided regular ETF's are tax efficient enough for me and it just wasn't worth it.

I also had an issue where I sold some in a Roth IRA and got dinged for taxes on it. The broker sent me a letter and deducted the amount out of my account. It was in regards to UBTI and depreciation recapture. Honestly, most tax preparers don't even really understand these things, which means I'm not going to either.

This was from an article regarding MLP's held in retirement accounts, this is what seems to have happened to me:

"The same applies to the cumulative expense deductions stretching back to when the IRA first acquired the MLP units. All the income that had been shielded from UBIT is now subject to it.

Suppose the IRA held the MLP units for five years. Over that period, let’s say the MLP generated $20,000 in cumulative gross income, but $15,000 of that income had been shielded from UBIT through various expense deductions. Suppose further that the IRA sells the MLP units for $75,000, representing a $25,000 gain over its original $50,000 it paid for the units five years ago. The $15,000 that had been shielded over the holding period now becomes subject to recapture. As such, it's treated as ordinary income and subject to UBIT. Only the $10,000 difference between the $25,000 gain and the recaptured $15,000 would constitute the amount of capital gain. This is the amount would be tax-deferred in an IRA."
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Re: MLP (Master Limited Partnerships)

Post by J295 »

pshonore wrote: Thu Jan 20, 2022 2:35 pm I've been an MLP investor for almost 20 years. While I would not recommend them to everyone, they can be a good source of tax deferred income. Most of the warnings about the dreaded K1 forms are an exaggeration. There are usually a half dozen numbers or so that go into your tax return which Turbo Tax handles nicely. And they do arrive usually in late February or early March.

The distributions are tax deferred as long as your basis exceeds zero. Basis equals purchase price plus items of income (if any). Distributions and operating losses reduce basis. Most MLPs have operating losses resulting from large amounts of depreciation. Your basis is actually tracked on the K1 and is available every year. Operating losses cannot be deducted until disposition of your entire interest or to offset any current operating income.

EPD (Enterprise Products Partners LP) is one of the largest and well most known MLPs. They're currently paying an 8.5 % distribution. The Alerian MLP Total Return Index (AMZX) has returned 10.2% annualized since 12/29/95

I will add that its usually not a good idea to buy an MLP in a tax-deferred account like a TIRA or a Roth. The reason is any operating earnings are considered UBTI (Unrelated Business Taxable Income) and your Custodian is required to prepare a 990 T tax return and use money from your IRA to pay that tax. Again while most MLPs do not generate operating income on an annual basis, they on sale since depreciation recapture is considered UBTI.

It can also be difficult to find a good tax preparer who understands MLPs if you don't prepare your own taxes.

+1

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Re: MLP (Master Limited Partnerships)

Post by jh »

.....
Last edited by jh on Wed Apr 27, 2022 11:04 pm, edited 1 time in total.
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Re: MLP (Master Limited Partnerships)

Post by pshonore »

jh wrote: Fri Jan 21, 2022 10:55 am
copenhagen227 wrote: Thu Jan 20, 2022 12:21 am Any general thoughts on investing in MLPs and on what their risk profile is? Recommendations on ones w steady income stream, low risk, liquidity, and diversified assets in real estate, infrastructure and energy? Thanks in advance

IMHO, MLPs are a good investment, but I would note that MLPs are kind of a dying structure. The companies that have traditionally been MLPs are also known as the "midstream energy sector" or also called "pipeline companies". Their purpose is to transport and store liquids and gases (i.e. primarily oil and gas) across the US. They are infrastructure companies in a similar vein to railroad companies. I think these companies have a great long-term future as I believe that "green and blue hydrogen" will play a very important role in the future. I also believe that natural gas will be in use for many many decades to come. They will also be used for carbon capture which is going to be needed for a very long time to make industrial and chemical industries compliant with carbon emission policies.

Anyway, over the last 5-6 years most MLPs have converted over to regular C-corp status. There are not that many "master limited partner" companies left as a result.

IMHO, I would recommend the etf MLPX which owns both MLPs and c-corp pipeline companies. This way as more and more pipeline companies change into c-corps you will not be stuck holding a shrinking basket of MLPs.

On an individual stock basis I recommend KMI which is actually a c-corp and not an MLP anymore. KMI transports around 40% of the natural gas in the US, which is used primarily by utility companies.
Looks like MLPX holds two MLPs (ET and EPD) which represent less than 10% of their holdings. There are a few others like MMP and MPLX which doesn't move the needle much. They are probably limited to 25% of their holding in "classic" MLPs It does pay roughly a 5% dividend but believe most of that is taxable.
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Re: MLP (Master Limited Partnerships)

Post by jackrabbit14 »

Once the cost basis equals zero in an MLP, is income taxed as ordinary income, or as a capital gain?

I've seen it stated both ways..
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Re: MLP (Master Limited Partnerships)

Post by gougou »

I bought a ton of ET and MPLX in late 2020 and 2021 when they were dirt cheap. MPLX still yields 9% regular dividends plus about 2% special dividends. I would stick with the large cap investment grade MLPs which include EPD, MPLX, ET, MMP, PAA. These investment grade MLPs have access to cheap debt, which is essential in the age of ESG investing when the junk rated fossil fuel companies have big trouble accessing the debt market and capital market.
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Re: MLP (Master Limited Partnerships)

Post by gougou »

jackrabbit14 wrote: Fri Jan 21, 2022 5:28 pm Once the cost basis equals zero in an MLP, is income taxed as ordinary income, or as a capital gain?

I've seen it stated both ways..
When basis is zero, you are taxed the regular rate (minus 20% QBI deduction) on your allocated portion of income. Distribution in excess of your allocated income is taxed at capital gains rate.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: MLP (Master Limited Partnerships)

Post by nisiprius »

Here's the comparative performance (hypothetical growth of $10,000) for Morningstar's category average of energy limited partnership funds, compared a similar category average for intermediate core bond funds (like Vanguard Total Bond).

Image

And here's MLPX compared to Total Bond.

Source

Image
  • Eight times the volatility of a bond fund, as measured by standard deviation,
  • Fifteen times the risk, as measured by maximum drawdown,
  • To have gotten no more return than a bond fund.
Why is this even interesting?
Last edited by nisiprius on Sat Jan 22, 2022 6:08 am, edited 1 time in total.
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Re: MLP (Master Limited Partnerships)

Post by gougou »

nisiprius wrote: Fri Jan 21, 2022 8:09 pm Here's the comparative performance (hypothetical growth of $10,000) for Morningstar's category average of energy limited partnership funds, compared to the Vanguard Total Bond Market Index Fund.

Image

And here's MLPX compared to Total Bond.

Source

Image
  • Eight times the volatility of a bond fund, as measured by standard deviation,
  • Fifteen times the risk, as measured by maximum drawdown,
  • To have gotten no more return than a bond fund.
Why is this even interesting?
Why is backtesting so interesting to you? Maybe you could put TSLA against Total Bond and conclude you should go 100% TSLA?
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Re: MLP (Master Limited Partnerships)

Post by theac »

nisiprius wrote: Fri Jan 21, 2022 8:09 pm Here's the comparative performance (hypothetical growth of $10,000) for Morningstar's category average of energy limited partnership funds, compared to the Vanguard Total Bond Market Index Fund.

Image

And here's MLPX compared to Total Bond.

Source

Image
  • Eight times the volatility of a bond fund, as measured by standard deviation,
  • Fifteen times the risk, as measured by maximum drawdown,
  • To have gotten no more return than a bond fund.
Why is this even interesting?
Interesting comparison in that chart.

In about 2008 I put $3,000 into TGP, a Nat Gas shipping transporter MLP.
200 sh at $15 ea.

Presently I have 343 sh at $17, so total value of $5,842
since at times I've reinvested the div, and at other times not.
Usually only reinvested whenever share price was low.

The highest balance it ever went to was about $13,000.
It was about $46 a share at that time.
Looking at that chart, I do think it was around 2015.

For years the div was about $117 Qtr, but is now at $97 and been on the rise.

Held it in my Vanguard ROTH for years,
and a couple of times a fee of about $75 annual was charged, not a big deal.

But last year I got an email notifying me that there would now be a new additional $300 annual tax-filing fee by Vanguard Brokerage.

So I transferred in-kind to Schwab, since they don't charge that tax-filing fee (called to verify before transferring, otherwise would have sold at Vanguard prior to year's end).

Anyway, I continue to hold it at Schwab, but seeing that chart now,
guess I'll just hang onto it for now, collect the dividend,
and if sometime in the future it's up again, will probably sell it.
Looks like I'm basically break-even with Total Bond Index after 14 years
(except for those $117 Qtr dividends I sometimes didn't reinvest when share price was up).

Thanks for that chart, gives a little perspective!
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Re: MLP (Master Limited Partnerships)

Post by 123 »

MLPs are generally "sold" rather than bought. They are marketed through financial advisors. The remuneration for the financial advisor is baked into the initial cost of the share(s). Many of them are illiquid. Individuals trying to get out of MLPs may be reluctant to reduce their price to the point where a financial adviser can easily resell it at a commission greater than new MLPs. Older/used/secondary MLP shares will often have an undesirable "history" that a new fresh-out-of-box with a glossy brochure simply can't have. MLPs can be financially complex products that can easily be purchased by investors looking for yield or potential tax benefits without a full appreciation of what they are getting into (likely for a long time).

Often MLP shares cannot be readily transferred from one brokerage firm to another. If one is purchased through a brokerage firm the investor is likely tied to that brokerage firm throughout the MLP relationship. If the investor has other holdings those may be moved to another brokerage but the MLP shares themselves are likely "stuck", unless they are sold at a very steep discount.
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Re: MLP (Master Limited Partnerships)

Post by theac »

123 wrote: Fri Jan 21, 2022 10:08 pm MLPs are generally "sold" rather than bought. They are marketed through financial advisors. The remuneration for the financial advisor is baked into the initial cost of the share(s). Many of them are illiquid. Individuals trying to get out of MLPs may be reluctant to reduce their price to the point where a financial adviser can easily resell it at a commission greater than new MLPs. Older/used/secondary MLP shares will often have an undesirable "history" that a new fresh-out-of-box with a glossy brochure simply can't have. MLPs can be financially complex products that can easily be purchased by investors looking for yield or potential tax benefits without a full appreciation of what they are getting into (likely for a long time).

Often MLP shares cannot be readily transferred from one brokerage firm to another. If one is purchased through a brokerage firm the investor is likely tied to that brokerage firm throughout the MLP relationship. If the investor has other holdings those may be moved to another brokerage but the MLP shares themselves are likely "stuck", unless they are sold at a very steep discount.
Just noticed, TGP was not an MLP, but an LP....ooops.

BUT, also just noticed this!

"TGP is defunct since January 13, 2022"

Appears they're been bought out by Seapeak,
so will look into what exactly that will mean.
Just noticed it now. :shock: I hope it's not bad news :D .

Still shows my balance at Schwab to be $5,843, so that's good,
but TGP itself appears to have fallen off the edge of the world.
Last edited by theac on Fri Jan 21, 2022 10:43 pm, edited 1 time in total.
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Re: MLP (Master Limited Partnerships)

Post by vikinged »

My experience with a MLP in a Vanguard ROTH account is a real head scratcher. I sold my Energy Transfer at a loss in 2019. I wasn't aware that Vanguard would have to complete a tax return for my account for UTBI. To my shock, the Vanguard tax hired gun computed that I owed the IRS $473 and took the money from my account. I was not happy, but since I was clueless on the mystery of the K-1's, I chocked it up another reason to avoid MLPs. Fast forward about six months and I get an amended return from Vanguard (filed on my behalf) stating no tax was due. I have now been waiting about a year to have the funds credited back to my account. Vanguard says they have to wait for the refund from the IRS. However, it was the Vanguard tax hired tax pro who screwed up the return in the first place. (Someone who had the same thing happen to them who actually knew something about the K1's probably raised hell with Vanguard and got the returns recomputed,) My Flagship rep (I still have one), did try to get Vanguard to process my refund, but even he was frustrated by the front office's insistence they couldn't process the refund until the IRS refunds the payment. My amended return is probably sitting in a five foot high pile of paper backlog at the IRS in COVID purgatory. :twisted:
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Re: MLP (Master Limited Partnerships)

Post by theac »

vikinged wrote: Fri Jan 21, 2022 10:30 pm My experience with a MLP in a Vanguard ROTH account is a real head scratcher. I sold my Energy Transfer at a loss in 2019. I wasn't aware that Vanguard would have to complete a tax return for my account for UTBI. To my shock, the Vanguard tax hired gun computed that I owed the IRS $473 and took the money from my account. I was not happy, but since I was clueless on the mystery of the K-1's, I chocked it up another reason to avoid MLPs. Fast forward about six months and I get an amended return from Vanguard (filed on my behalf) stating no tax was due. I have now been waiting about a year to have the funds credited back to my account. Vanguard says they have to wait for the refund from the IRS. However, it was the Vanguard tax hired tax pro who screwed up the return in the first place. (Someone who had the same thing happen to them who actually knew something about the K1's probably raised hell with Vanguard and got the returns recomputed,) My Flagship rep (I still have one), did try to get Vanguard to process my refund, but even he was frustrated by the front office's insistence they couldn't process the refund until the IRS refunds the payment. My amended return is probably sitting in a five foot high pile of paper backlog at the IRS in COVID purgatory. :twisted:
Hmmm, maybe Vanguard charges similar fees for MLPs and LPs.

The reason I put it in a ROTH was to avoid taxes on it, and was surprised that 1st year when I got hit with the $75 fee, but it was not that big a deal.
When they notified me about the $300 annual tax-filing fee, that was a big deal.

Anyway, was also surprised that it was not actually 100% tax-free in a ROTH!
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Re: MLP (Master Limited Partnerships)

Post by unclescrooge »

gougou wrote: Fri Jan 21, 2022 5:38 pm I bought a ton of ET and MPLX in late 2020 and 2021 when they were dirt cheap. MPLX still yields 9% regular dividends plus about 2% special dividends. I would stick with the large cap investment grade MLPs which include EPD, MPLX, ET, MMP, PAA. These investment grade MLPs have access to cheap debt, which is essential in the age of ESG investing when the junk rated fossil fuel companies have big trouble accessing the debt market and capital market.
How safe is this 9% yield?
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Re: MLP (Master Limited Partnerships)

Post by unclescrooge »

vikinged wrote: Fri Jan 21, 2022 10:30 pm My experience with a MLP in a Vanguard ROTH account is a real head scratcher. I sold my Energy Transfer at a loss in 2019. I wasn't aware that Vanguard would have to complete a tax return for my account for UTBI. To my shock, the Vanguard tax hired gun computed that I owed the IRS $473 and took the money from my account. I was not happy, but since I was clueless on the mystery of the K-1's, I chocked it up another reason to avoid MLPs. Fast forward about six months and I get an amended return from Vanguard (filed on my behalf) stating no tax was due. I have now been waiting about a year to have the funds credited back to my account. Vanguard says they have to wait for the refund from the IRS. However, it was the Vanguard tax hired tax pro who screwed up the return in the first place. (Someone who had the same thing happen to them who actually knew something about the K1's probably raised hell with Vanguard and got the returns recomputed,) My Flagship rep (I still have one), did try to get Vanguard to process my refund, but even he was frustrated by the front office's insistence they couldn't process the refund until the IRS refunds the payment. My amended return is probably sitting in a five foot high pile of paper backlog at the IRS in COVID purgatory. :twisted:
I don't know the specifics, but if your MLP generates over $1,000 of income, within a tax deferred account you will owe UBTI.

Never hold them in a tax deferred account!
gougou
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Re: MLP (Master Limited Partnerships)

Post by gougou »

unclescrooge wrote: Fri Jan 21, 2022 10:44 pm
gougou wrote: Fri Jan 21, 2022 5:38 pm I bought a ton of ET and MPLX in late 2020 and 2021 when they were dirt cheap. MPLX still yields 9% regular dividends plus about 2% special dividends. I would stick with the large cap investment grade MLPs which include EPD, MPLX, ET, MMP, PAA. These investment grade MLPs have access to cheap debt, which is essential in the age of ESG investing when the junk rated fossil fuel companies have big trouble accessing the debt market and capital market.
How safe is this 9% yield?
MPLX has a reasonable amount of debt. It has investment grade (BBB) balance sheet so it gets to issue debt at 2% to 3% interest rate. It owns a lot of assets with long term contracts and it also has some promising growth projects.

It has raised its dividend every year since it went public in 2012. Its earnings and cashflow have been extremely resilient every year, even in 2020. In 2021 it paid a special dividend, bought back some stocks, raised its regular dividend by 2.5% and paid off some debt. The free cashflow was about 150% the regular dividend in 2021. Management obviously believe the dividends are sustainable otherwise they would be preserving capital.

I guess the risk is that people transition to EV very quickly in the next 10 years and refineries become obsolete (MPLX has a lot of pipelines/terminals/storage that serve refineries). I personally believe the huge EV push is a massive bubble but I don’t dare to short it, so I’m buying cheap oil companies instead.

With 9% dividend plus 2% special dividend and 2.5% annual growth you are looking at a double digit return. When I first bought it it was yielding 15% and the sky was falling on oil stocks.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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unclescrooge
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Re: MLP (Master Limited Partnerships)

Post by unclescrooge »

gougou wrote: Fri Jan 21, 2022 11:25 pm
unclescrooge wrote: Fri Jan 21, 2022 10:44 pm
gougou wrote: Fri Jan 21, 2022 5:38 pm I bought a ton of ET and MPLX in late 2020 and 2021 when they were dirt cheap. MPLX still yields 9% regular dividends plus about 2% special dividends. I would stick with the large cap investment grade MLPs which include EPD, MPLX, ET, MMP, PAA. These investment grade MLPs have access to cheap debt, which is essential in the age of ESG investing when the junk rated fossil fuel companies have big trouble accessing the debt market and capital market.
How safe is this 9% yield?
MPLX has a reasonable amount of debt. It has investment grade (BBB) balance sheet so it gets to issue debt at 2% to 3% interest rate. It owns a lot of assets with long term contracts and it also has some promising growth projects.

It has raised its dividend every year since it went public in 2012. Its earnings and cashflow have been extremely resilient every year, even in 2020. In 2021 it paid a special dividend, bought back some stocks, raised its regular dividend by 2.5% and paid off some debt. The free cashflow was about 150% the regular dividend in 2021. Management obviously believe the dividends are sustainable otherwise they would be preserving capital.

I guess the risk is that people transition to EV very quickly in the next 10 years and refineries become obsolete (MPLX has a lot of pipelines/terminals/storage that serve refineries). I personally believe the huge EV push is a massive bubble but I don’t dare to short it, so I’m buying cheap oil companies instead.

With 9% dividend plus 2% special dividend and 2.5% annual growth you are looking at a double digit return. When I first bought it it was yielding 15% and the sky was falling on oil stocks.
Congrats on your timely purchase. Seems like it would be a good fit for seniors looking for income and with 10-15 years time horizons.

I also think EVs are in a bubble.
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Re: MLP (Master Limited Partnerships)

Post by rosalee »

I bought some shares of EPD and PSXP last year; yeah i know 'sinning greatly', coz i wanted the dividends. I'm long retired, age 78, live frugally in Asia, doing my best to double my SSA check each month with dividends, which combined will add up to $2000 per month. I did read on these pages about some of the demerits of the MLP scheme.

I pay no IRS nor state taxes, and hold only tax liable Schwab broker accounts. I thought then, early 2021, the above MLPs could provide me good income and if i held them until i die, then my 2 kids would benefit. I don't plan to sell any shares.

I have yet to file an IRS form with these K-1s, so don't know what's in store for me. My online tax company lists K-1 as acceptable to them. I have recently read that PSXP will be soon taken back by PSX and the partnership dissolved so i don't know how that will affect me.

Sure, i like the dividends and even the price increase, esp of PSXP but i guess am a bit leary of unknown (to me) tax implications of K-1 forms. Appreciate any guidance.
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Re: MLP (Master Limited Partnerships)

Post by nisiprius »

I've modified the first chart above. Previously I was comparing Morningstar's category average of all energy limited partnership funds to a single bond fund, which was comparing the average energy limited partnership fund to a better-than-average bond fund.

To make a fairer comparison, I replaced the chart with one comparing average energy limited partnership funds to a similar category average for all intermediate-term core bond funds.

Standard disclaimer, past performance is no sure indicator of future results. Backtesting is what it is.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
pshonore
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Re: MLP (Master Limited Partnerships)

Post by pshonore »

123 wrote: Fri Jan 21, 2022 10:08 pm MLPs are generally "sold" rather than bought. They are marketed through financial advisors. The remuneration for the financial advisor is baked into the initial cost of the share(s). Many of them are illiquid. Individuals trying to get out of MLPs may be reluctant to reduce their price to the point where a financial adviser can easily resell it at a commission greater than new MLPs. Older/used/secondary MLP shares will often have an undesirable "history" that a new fresh-out-of-box with a glossy brochure simply can't have. MLPs can be financially complex products that can easily be purchased by investors looking for yield or potential tax benefits without a full appreciation of what they are getting into (likely for a long time).

Often MLP shares cannot be readily transferred from one brokerage firm to another. If one is purchased through a brokerage firm the investor is likely tied to that brokerage firm throughout the MLP relationship. If the investor has other holdings those may be moved to another brokerage but the MLP shares themselves are likely "stuck", unless they are sold at a very steep discount.
MLPs are NOT marketed through financial advisors. They are bought and sold just like any other individual stock, ETF or mutual fund. Nor are they illiquid. I will agree they can be complex investments but there is a wealth of information about them as well as much on tax ramifications online if one wants to do a Google search. I am also not aware of any problems trying to move them from one broker to another.
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Re: MLP (Master Limited Partnerships)

Post by flyingcows »

I think the Non-Resident state tax filings would be a headache, but I guess once your CPA (Or rather, accounting firm) is setup to file in all of these states perhaps it's not so onerous each year. Although from I understand the K-1s don't come until March/April, which would be annoying to wait on or I guess file an extension every year.

Don't some states require you to file a non-resident return if you earned any income in that state, even if your liability to them ends up being $0? If you never file these returns, the statute of limitations never runs. Perhaps the $0 of tax liability turns into a considerable sum 30 years later when failure to file fees and interest are taken into account

Another thing I'm not clear on with MLPs are local taxes, is there such a thing as "non resident" local tax filing expectations for these? I guess the income for that locacle would show up on the K-1 so you would know, but I'm curious.
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jackrabbit14
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Re: MLP (Master Limited Partnerships)

Post by jackrabbit14 »

gougou wrote: Fri Jan 21, 2022 6:56 pm
jackrabbit14 wrote: Fri Jan 21, 2022 5:28 pm Once the cost basis equals zero in an MLP, is income taxed as ordinary income, or as a capital gain?

I've seen it stated both ways..
When basis is zero, you are taxed the regular rate (minus 20% QBI deduction) on your allocated portion of income. Distribution in excess of your allocated income is taxed at capital gains rate.
Thank you for the explanation.
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Re: MLP (Master Limited Partnerships)

Post by gougou »

rosalee wrote: Sat Jan 22, 2022 5:51 am I bought some shares of EPD and PSXP last year; yeah i know 'sinning greatly', coz i wanted the dividends. I'm long retired, age 78, live frugally in Asia, doing my best to double my SSA check each month with dividends, which combined will add up to $2000 per month. I did read on these pages about some of the demerits of the MLP scheme.

I pay no IRS nor state taxes, and hold only tax liable Schwab broker accounts. I thought then, early 2021, the above MLPs could provide me good income and if i held them until i die, then my 2 kids would benefit. I don't plan to sell any shares.

I have yet to file an IRS form with these K-1s, so don't know what's in store for me. My online tax company lists K-1 as acceptable to them. I have recently read that PSXP will be soon taken back by PSX and the partnership dissolved so i don't know how that will affect me.

Sure, i like the dividends and even the price increase, esp of PSXP but i guess am a bit leary of unknown (to me) tax implications of K-1 forms. Appreciate any guidance.
Your PSXP will convert to PSX stocks when the deal closes. It will be taxable so you’ll realize all the capital gains on PSXP this year when the deal closes. If you don’t want to invest in PSX I’d recommend you to sell PSX stocks as soon as you receive them.

Some MLPs have lower chance of getting bought out (which forces a taxable event on unit-holders). EPD is one such independent MLP that doesn’t have a sponsor who can buy it out anytime they want. ET, MMP, PAA are also independent. MPLX is usually considered too big for MPC to buy out. If you just buy EPD with the money you got from PSXP you would probably do very well.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
pshonore
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Re: MLP (Master Limited Partnerships)

Post by pshonore »

jackrabbit14 wrote: Sat Jan 22, 2022 4:06 pm
gougou wrote: Fri Jan 21, 2022 6:56 pm
jackrabbit14 wrote: Fri Jan 21, 2022 5:28 pm Once the cost basis equals zero in an MLP, is income taxed as ordinary income, or as a capital gain?

I've seen it stated both ways..
When basis is zero, you are taxed the regular rate (minus 20% QBI deduction) on your allocated portion of income. Distribution in excess of your allocated income is taxed at capital gains rate.
Thank you for the explanation.
A couple of points.
1. If you reinvest distributions, your basis will "last longer"
2. If you make an additional purchase of the sme MLP, your basis will increase by the amount of the purchase.
3. If you have non-recourse liabilities (look in the K1 Section II Box K), you can include them in your basis calculation to avoid paying cap gains tax. That does get rather complicated though.
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Re: MLP (Master Limited Partnerships)

Post by rossington »

pshonore wrote: Sun Jan 23, 2022 9:43 am
jackrabbit14 wrote: Sat Jan 22, 2022 4:06 pm
gougou wrote: Fri Jan 21, 2022 6:56 pm
jackrabbit14 wrote: Fri Jan 21, 2022 5:28 pm Once the cost basis equals zero in an MLP, is income taxed as ordinary income, or as a capital gain?

I've seen it stated both ways..
When basis is zero, you are taxed the regular rate (minus 20% QBI deduction) on your allocated portion of income. Distribution in excess of your allocated income is taxed at capital gains rate.
Thank you for the explanation.
A couple of points.
1. If you reinvest distributions, your basis will "last longer"
2. If you make an additional purchase of the sme MLP, your basis will increase by the amount of the purchase.
3. If you have non-recourse liabilities (look in the K1 Section II Box K), you can include them in your basis calculation to avoid paying cap gains tax. That does get rather complicated though.
I would like to add these points too:

Q. What is nonrecourse debt?
A. It is Partnership liabilities for which no partner or related person bears the economic
risk of loss.

Q. How do cash distributions, income, and nonrecourse debt affect my tax basis?
A. Your share of the Partnership's taxable income and nonrecourse debt increase your
tax basis. Your share of the Partnership's taxable loss and cash distributions decrease
your tax basis.

Q. Do I report the cash distributions I received as my taxable income?
A. Generally, cash distributions from the Partnership are a return of capital and not
reported in taxable income. However, if your cash distributions cause your tax basis to
fall below zero, you must report in taxable income the portion of your cash distributions
necessary to restore your tax basis back to zero.

Q. Why is the amount of cash I received different from my allocable share of partnership
income, gain, loss, deduction or credit?
A. The Partnership distributes available cash as determined by the Partnership
agreement. The calculation of cash available for distribution differs from the calculation of
taxable income reported to the partners.

Q. How do Passive Activity Loss Limitation rules affect my income reporting?
A. Depending on when you acquired your units and the operational results of the
Partnership, you will have either net passive activity income or net passive activity loss in
2020. Generally, if you have net passive activity loss, you may not recognize this loss in
the current year. If you have net passive activity income, you should first offset this
income with any prior suspended losses and report any net income currently. Please
consult your personal tax advisor for the appropriate tax treatment.

Q. What is Unrelated Business Taxable Income (UBTI)?
A. UBTI is the distributive share of income/{loss) from a publicly traded partnership which
is considered to be unrelated to the regular activities of a tax-exempt organization
(including IRA's, Keogh and other qualified retirement plans). Each tax-exempt
organization is entitled to an annual $1,000 deduction to offset their net UBTI income.
UBTI also includes gains on the sales of publicly traded partnership units. UBTI income
and/or related gains that exceed the annual $1,000 deduction could result in your
requirement to file Form 990-T, which your trustee may file on your behalf. You should
consult your trustee and/or personal tax advisor for the appropriate tax treatment.

Q. If I sell my Partnership units at a gain, why is part of the gain treated as ordinary
income rather than capital gain?
A. A sale of partnership units is treated as if there were a sale of the partner's allocable
share of each of the Partnership's assets. Gain on the sale of assets for which
depreciation deductions have been taken is generally treated as ordinary income rather
than capital gain.

Q. What is Alternative Minimum Tax {AMT) Depreciation Adjustment?
A. The AMT depreciation adjustment amount represents the difference between
depreciation for AMT purposes and depreciation for regular tax purposes. This
adjustment is necessary in the calculation of your alternative minimum tax.

Q. Am I required to file tax returns in any state in which I do not live?
A. Certain states require partners to file tax returns in the states in which the Partnership
operates. The Partnership complies with state tax reporting requirements.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
jackrabbit14
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Re: MLP (Master Limited Partnerships)

Post by jackrabbit14 »

pshonore wrote: Sun Jan 23, 2022 9:43 am
jackrabbit14 wrote: Sat Jan 22, 2022 4:06 pm
gougou wrote: Fri Jan 21, 2022 6:56 pm
jackrabbit14 wrote: Fri Jan 21, 2022 5:28 pm Once the cost basis equals zero in an MLP, is income taxed as ordinary income, or as a capital gain?

I've seen it stated both ways..
When basis is zero, you are taxed the regular rate (minus 20% QBI deduction) on your allocated portion of income. Distribution in excess of your allocated income is taxed at capital gains rate.
Thank you for the explanation.
A couple of points.
1. If you reinvest distributions, your basis will "last longer"
2. If you make an additional purchase of the sme MLP, your basis will increase by the amount of the purchase.
3. If you have non-recourse liabilities (look in the K1 Section II Box K), you can include them in your basis calculation to avoid paying cap gains tax. That does get rather complicated though.
Can you expand upon this a little more, or direct me to somewhere on the web that details how to do this?

Here is a note from last year's EPD K1:

Q. How do cash distributions, income, and nonrecourse debt affect my tax basis?
A. Your share of the Partnership's taxable income and nonrecourse debt increase your
tax basis. Your share of the Partnership's taxable loss and cash distributions decrease
your tax basis.

I have held EPD since 2016 (inherited, and have never sold or purchased any shares since), and I never see non-recourse debt included in the Section L "Partner's Capital Account Analysis".

All that is used in the calculation is the net loss and distribution which are summed and then subtracted from the total of my Capital Account (tax basis at the start of the tax year) which, of course, drives down my tax basis. Non-recourse debt is never included to drive it back up.
pshonore
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Re: MLP (Master Limited Partnerships)

Post by pshonore »

jackrabbit14 wrote: Sun Jan 23, 2022 2:54 pm
pshonore wrote: Sun Jan 23, 2022 9:43 am
jackrabbit14 wrote: Sat Jan 22, 2022 4:06 pm
gougou wrote: Fri Jan 21, 2022 6:56 pm
jackrabbit14 wrote: Fri Jan 21, 2022 5:28 pm Once the cost basis equals zero in an MLP, is income taxed as ordinary income, or as a capital gain?

I've seen it stated both ways..
When basis is zero, you are taxed the regular rate (minus 20% QBI deduction) on your allocated portion of income. Distribution in excess of your allocated income is taxed at capital gains rate.
Thank you for the explanation.
A couple of points.
1. If you reinvest distributions, your basis will "last longer"
2. If you make an additional purchase of the sme MLP, your basis will increase by the amount of the purchase.
3. If you have non-recourse liabilities (look in the K1 Section II Box K), you can include them in your basis calculation to avoid paying cap gains tax. That does get rather complicated though.
Can you expand upon this a little more, or direct me to somewhere on the web that details how to do this?

Here is a note from last year's EPD K1:

Q. How do cash distributions, income, and nonrecourse debt affect my tax basis?
A. Your share of the Partnership's taxable income and nonrecourse debt increase your
tax basis. Your share of the Partnership's taxable loss and cash distributions decrease
your tax basis.

I have held EPD since 2016 (inherited, and have never sold or purchased any shares since), and I never see non-recourse debt included in the Section L "Partner's Capital Account Analysis".

All that is used in the calculation is the net loss and distribution which are summed and then subtracted from the total of my Capital Account (tax basis at the start of the tax year) which, of course, drives down my tax basis. Non-recourse debt is never included to drive it back up.
Look in Box K of the K1. For some reason unknown to me, non-recourse liabilities are not used in the Partners Cap Account Analysis box. Not sure why but AFAIK they don't affect your basis when selling and perhaps thats the reason. By the way, if you inherited these units, you should have gotten a step up (or down) in basis at that time. That should have changed your tax situation quite a bit, in effect starting all over again on basis, ordinary income, etc. Do you have access to the K1 forms of the previous owner?
jackrabbit14
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Re: MLP (Master Limited Partnerships)

Post by jackrabbit14 »

Yes, I did get a reset (step-up) in basis upon transfer.

But, I just noticed that the wrong date of transfer was used in my first K1 (2016). This results in an significant error not in my favor, so I suppose I now need to contact EPD's K1 support services to have this corrected.

As far as the non-recourse debt, yes I do see it in Box K. But as I said, I do not see it used to increase my basis despite the note in the K1 stating that it does. Perhaps EPD means that I need to use it when my basis hits zero (which looks to be in 3-4 years if the current trend continues). Which I guess is what you were saying before:

3. If you have non-recourse liabilities (look in the K1 Section II Box K), you can include them in your basis calculation to avoid paying cap gains tax. That does get rather complicated though.

It's just not clear to me what steps (calculations) I will need to make when the time comes. I also know that I will be able to add Ordinary Business losses (which are cumulatively tracked on the K1) to my basis when it hits zero.

I either need to find a resource on the net that walks through how to deal with the tax forms and calcs when I hit zero, or find a tax accountant who is familiar with dealing with this.
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Re: MLP (Master Limited Partnerships)

Post by pshonore »

jackrabbit14 wrote: Mon Jan 24, 2022 3:22 pm Yes, I did get a reset (step-up) in basis upon transfer.

But, I just noticed that the wrong date of transfer was used in my first K1 (2016). This results in an significant error not in my favor, so I suppose I now need to contact EPD's K1 support services to have this corrected.

As far as the non-recourse debt, yes I do see it in Box K. But as I said, I do not see it used to increase my basis despite the note in the K1 stating that it does. Perhaps EPD means that I need to use it when my basis hits zero (which looks to be in 3-4 years if the current trend continues). Which I guess is what you were saying before:

3. If you have non-recourse liabilities (look in the K1 Section II Box K), you can include them in your basis calculation to avoid paying cap gains tax. That does get rather complicated though.

It's just not clear to me what steps (calculations) I will need to make when the time comes. I also know that I will be able to add Ordinary Business losses (which are cumulatively tracked on the K1) to my basis when it hits zero.

I either need to find a resource on the net that walks through how to deal with the tax forms and calcs when I hit zero, or find a tax accountant who is familiar with dealing with this.
Simply add the non-recourse liabilities to the ending basis in the Capital account. If the result is greater than zero, there's no need to pay tax on the distributions. Business losses (primarily Box 1) REDUCE basis. You cannot add them to your basis. Business operating income increases basis. Unusual but it has occurred a few times with EPD. Assuming you have previous year losses, you can use them to offset any current operating income in Box 1, but Turbo Tax will do that for you automatically. What software have you been using?

Unfortunately, there are very few guides to MLP taxation. Sometimes good info on Turbo Tax discission boards.
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Cheez-It Guy
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Re: MLP (Master Limited Partnerships)

Post by Cheez-It Guy »

My parents had several MLP "investments" in an inherited account from Merrill Lynch ("full service" brokerage). What an opaque mess! It still annoys me to think about it. I'm glad they're long gone (the investments, not my parents)!
jackrabbit14
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Re: MLP (Master Limited Partnerships)

Post by jackrabbit14 »

pshonore wrote: Mon Jan 24, 2022 4:50 pm
jackrabbit14 wrote: Mon Jan 24, 2022 3:22 pm Yes, I did get a reset (step-up) in basis upon transfer.

But, I just noticed that the wrong date of transfer was used in my first K1 (2016). This results in an significant error not in my favor, so I suppose I now need to contact EPD's K1 support services to have this corrected.

As far as the non-recourse debt, yes I do see it in Box K. But as I said, I do not see it used to increase my basis despite the note in the K1 stating that it does. Perhaps EPD means that I need to use it when my basis hits zero (which looks to be in 3-4 years if the current trend continues). Which I guess is what you were saying before:

3. If you have non-recourse liabilities (look in the K1 Section II Box K), you can include them in your basis calculation to avoid paying cap gains tax. That does get rather complicated though.

It's just not clear to me what steps (calculations) I will need to make when the time comes. I also know that I will be able to add Ordinary Business losses (which are cumulatively tracked on the K1) to my basis when it hits zero.

I either need to find a resource on the net that walks through how to deal with the tax forms and calcs when I hit zero, or find a tax accountant who is familiar with dealing with this.
Simply add the non-recourse liabilities to the ending basis in the Capital account. If the result is greater than zero, there's no need to pay tax on the distributions. Business losses (primarily Box 1) REDUCE basis. You cannot add them to your basis. Business operating income increases basis. Unusual but it has occurred a few times with EPD. Assuming you have previous year losses, you can use them to offset any current operating income in Box 1, but Turbo Tax will do that for you automatically. What software have you been using?

Unfortunately, there are very few guides to MLP taxation. Sometimes good info on Turbo Tax discission boards.
First, let me tell you that I really appreciate you taking the time to explain these things to me. :sharebeer

I have a hard time understanding why losses reduce basis. I also have a hard time understanding why these losses can't be used to offset distributions after basis gets to zero. Apparently I'm supposed to track the cumulative losses, but can only use them if I ever dispose of all of my interest in EPD or to offset any future positive income (which you did point out).

I do use (and have been using) TT.

I need to re-read last year's K1 and then stare at the wall for a while...sigh :?
pshonore
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Re: MLP (Master Limited Partnerships)

Post by pshonore »

I always forget that an MLP is really just another from of a partnership although we are "limited partners". It may help If you google "Partnership Accounting"
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theac
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Re: MLP (Master Limited Partnerships)

Post by theac »

unclescrooge wrote: Fri Jan 21, 2022 10:50 pm
vikinged wrote: Fri Jan 21, 2022 10:30 pm My experience with a MLP in a Vanguard ROTH account is a real head scratcher. I sold my Energy Transfer at a loss in 2019. I wasn't aware that Vanguard would have to complete a tax return for my account for UTBI. To my shock, the Vanguard tax hired gun computed that I owed the IRS $473 and took the money from my account. I was not happy, but since I was clueless on the mystery of the K-1's, I chocked it up another reason to avoid MLPs. Fast forward about six months and I get an amended return from Vanguard (filed on my behalf) stating no tax was due. I have now been waiting about a year to have the funds credited back to my account. Vanguard says they have to wait for the refund from the IRS. However, it was the Vanguard tax hired tax pro who screwed up the return in the first place. (Someone who had the same thing happen to them who actually knew something about the K1's probably raised hell with Vanguard and got the returns recomputed,) My Flagship rep (I still have one), did try to get Vanguard to process my refund, but even he was frustrated by the front office's insistence they couldn't process the refund until the IRS refunds the payment. My amended return is probably sitting in a five foot high pile of paper backlog at the IRS in COVID purgatory. :twisted:
I don't know the specifics, but if your MLP generates over $1,000 of income, within a tax deferred account you will owe UBTI.

Never hold them in a tax deferred account!
But if it earns less than $1,000 income per year in a ROTH IRA,
then it wouldn't trigger UBTI, so then it would be OK in a ROTH right?
Just so long as it's not a large holding.

I found this in an article and that's how I understand it:

Advisor Insight
Silber Bennett Financial, Los Angeles, Calif.

Yes, you may own MLPs in your Roth IRA, but there are some potentially unfavorable tax consequences to doing so. IRAs are subject to taxes on a special type of income called unrelated business taxable income, or "UBTI." The distributions paid by MLPs are likely to be considered UBTI.

If a Roth IRA earns $1,000 or more of UBTI annually, the UBTI income above $1,000 is subject to tax even if the securities are held in a retirement account, which is typically not taxed. If your retirement account earns $1,000 or more per year in UBTI, you have just eliminated the tax advantage of your retirement account.

It is usually a good idea to hold individual MLPs in a taxable account versus a retirement account.
"We keep you alive to serve this ship. Row well...and live." Ben Hur...and The Taxman! hahaha (a George Harrison song)
pshonore
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Re: MLP (Master Limited Partnerships)

Post by pshonore »

That article is inaccurate in that distributions are not considered UBTI (nor is interest, most cap gains, dividends, royalties etc). UBTI usually results from operating earnings but most MLPs have negative earnings. However upon sale, depreciation gets recaptured and can be the major source of UBTI. One way to avoid this is to sell the MLP in late December and buy it back in early January. That would be a nontaxable transaction in an IRA but it will reset the books for UBTI.
alfaspider
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Re: MLP (Master Limited Partnerships)

Post by alfaspider »

Cheez-It Guy wrote: Mon Jan 24, 2022 5:43 pm My parents had several MLP "investments" in an inherited account from Merrill Lynch ("full service" brokerage). What an opaque mess! It still annoys me to think about it. I'm glad they're long gone (the investments, not my parents)!
It is a mess, but MLPs do make sense from a tax standpoint for elderly investors who intend to leave the MLPs to their heirs. The original investor uses up all of the tax basis, which is then restored when the heir inherits them. That is what could make them more attractive than bonds. Of course, you have the reporting headache to deal with.
bsteiner
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Re: MLP (Master Limited Partnerships)

Post by bsteiner »

Taxation of partnerships and partners is complicated. I had a case involving a nonpracticing accountant who reported his share of partnership items incorrectly. The IRS sought to impose a penalty because he was an accountant. I argued that he wasn't a practicing accountant, and that partnership taxation was complicated. The case was settled.
gougou
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Joined: Thu Sep 28, 2017 7:42 pm

Re: MLP (Master Limited Partnerships)

Post by gougou »

pshonore wrote: Wed Jan 26, 2022 7:00 am That article is inaccurate in that distributions are not considered UBTI (nor is interest, most cap gains, dividends, royalties etc). UBTI usually results from operating earnings but most MLPs have negative earnings. However upon sale, depreciation gets recaptured and can be the major source of UBTI. One way to avoid this is to sell the MLP in late December and buy it back in early January. That would be a nontaxable transaction in an IRA but it will reset the books for UBTI.
That’s interesting. Can you sell on Dec 31, buy it back Jan 1 to reset the UBTI, and then sell off completely to avoid UBTI altogether? If this works it seems like a good strategy to hold MLPs in IRAs tax-free.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
djsander2022
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Joined: Sat Apr 13, 2019 2:26 pm

Re: MLP (Master Limited Partnerships)

Post by djsander2022 »

I worked for an MLP and started getting long term incentive bonus in units. I thought wow this will grow tax free and the K1 was initially not to bad. However, I sold my units and it became a real pain especially with figuring gains. So each year they vested I would immediately sell them. I retired last year so this should be the final year of dealing with the K1 and my taxes will become very simple once again. Also, I just realized in 2019 I hit the threshold for filing on Oklahoma so I got on TT and paid $45 this afternoon to download the 2019 state and did that with the penalties I owe OK about $85. What a pain. I double checked all the other states and this appears to be the only one. Part of the reason I went to immediately cashing them out was the issue of possibly doing taxes in states with little income. The other big state was Arkansas which I was under the limit and Louisiana which I was a resident at the time so that had been filed anyway. I need to see if I want to amend my La return and recover the money or just let them keep it. The big thing is the tax reporting gets complicated and you can end up filing in multiple states. TT does an ok job of the MLPs until you sell. It’s difficult if you hold multiple lots. If you have to pay an accountant every year. I’ve heard if you find one that knows how to do them it adds about 400 dollars to their fees.
rossington
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Location: Florida

Re: MLP (Master Limited Partnerships)

Post by rossington »

pshonore wrote: Wed Jan 26, 2022 7:00 am However upon sale, depreciation gets recaptured and can be the major source of UBTI.
Where can the cumulative depreciation figure subject to recapture be found? Is it on the K-1?

Does anyone know?
Thanks.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
pshonore
Posts: 8212
Joined: Sun Jun 28, 2009 2:21 pm

Re: MLP (Master Limited Partnerships)

Post by pshonore »

rossington wrote: Wed Jan 26, 2022 4:59 pm
pshonore wrote: Wed Jan 26, 2022 7:00 am However upon sale, depreciation gets recaptured and can be the major source of UBTI.
Where can the cumulative depreciation figure subject to recapture be found? Is it on the K-1?

Does anyone know?
Thanks.
Every MLP will send you a K1. Most go through a website called taxpackagesupport.com. Most of those also make available a "gain/loss calculator" where they detail by lot (at a sale price you fill in to do what-if calculations):

1. adjustment to basis
2. ordinary gain
3. cap gain/loss (usually shown but not applicable to TIRAs and Roths)

Those numbers which you can access when the K1 forms are ready in late February or March are as of 12/31 of the previous year.

K1 forms now also show total of previously unallowed losses. (which become available upon disposition of your total interest). For taxable accounts, TT software also keeps track of those losses and will apply them if you tell it you disposed of your entire interest.

Also remember that UBTI involves Form 990 which gets filled out by the Custodians preparer. (usually farmed out to Price Waterhouse)
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