What is an MLP in oil and gas?
Master Limited Partnerships, or MLPs, are companies engaged in the transportation, storage, processing, and production of natural resources. When most investors think about MLPs, they focus on midstream —those companies involved in transportation, storage, and processing.
What is the advantage of a master limited partnership?
Advantages of Master Limited Partnerships (MLPs) This slow and steady growth means MLPs are low risk. They earn a stable income often based on long-term service contracts. MLPs offer steady cash flows and consistent cash distributions. The cash distributions of MLPs usually grow slightly faster than inflation.
What is the difference between a limited partnership and a master limited partnership?
For limited partnerships and master limited partnerships, the simplest way to explain the difference between the two business structures is that the latter is publicly traded while offering the tax benefits of a limited partnership.
Are MLPs required to make distributions?
MLPs are publicly traded business entities that pay mandatory, regular dividends. But unlike a REIT, which is required to distribute 90% of its income to shareholders, an MLP only has to distribute the amount set forth in the partnership agreement – but that amount can increase.
Is LP same as MLP?
MLPs contain two business entities: the limited partner (LP) and the general partner (GP). The limited partner invests capital into the venture and obtains periodic cash distributions, while the general partner oversees the MLP’s operations and receives incentive distributions rights (IDRs).
How is a master limited partnership taxed?
MLPs are pass-through entities, meaning they don’t pay taxes on their earnings as long as they pass the vast majority of them on to investors as distributions.
How are distributions from limited partnerships taxed?
Limited partners receive income in the form of distributions. Part of the distribution may be taxed as ordinary income, part may be treated as capital gains, and part may not be taxed at all if it is a return of invested capital. Although the limited partners must pay tax on the income, this income is taxed only once.
How much taxes do you pay on MLP distributions?
For the vast majority of investors, the capital gains taxes paid on income earned by MLPs, once the cost basis has hit zero, is 0% or 15%. Even if you’re in the top tax bracket, you end up paying half the tax rate compared with what you would pay if distributions were taxed as ordinary income.