That is the question !
First – What is a MLP?
A MLP is an acronym for Master Limited Partnership. Basically it’s a tax structure allowed that passes income to the shareholders (Called Unit Holders) through Dividends ( Called Distributions). MLP’s are popular because they are known for paying very high dividend yields.
They are not very friendly when held in Tax Deferred accounts because if you sell them or special situations occur it can generate taxable income even within a tax deferred account. And it can also be a complete pain. So most people own them in taxable accounts but even there they can be a real pain. For the most part you will find them in the Oil and Gas related companies, although there are a few in other industries. One that comes to mind is Stonemor (STON) which is in the funeral and burial industry. They have tax advantages also and like I said above they can pay really great Dividends (Distributions).
They are usually set up in complicated owner structures that help to serve and protect the main company. You can have a general partner with several limited partnerships operating below it. I have found that they are easily manipulated and merged between partnerships so as to serve the majority owners at the cost of the common shareholders (unit holders). They can easily dilute the shares, lower the distributions and a host of other moves that are not friendly to unit holders. MLPs are also notorious for reducing distributions or cutting them completely with no warning.
Because of the High yields (distributions) many are willing to accept this. Perhaps the biggest headache though is trying to do your taxes, especially for people like me that does his own. I had about 20 MLPs to enter this year. Each company issues a K-1 statement which is a tax form that must be reported in your tax paperwork. The first problem is they can arrive a late as a couple of weeks before your taxes are due putting you under a lot of pressure to finish your taxes before the tax due date. Now, I understand that you can file extensions but if you expect to owe tax then you have to pay an estimated tax payment when you file the extension which can also complicate matters. I enjoy doing my own taxes and utilize the Turbo Tax software to doing it, which makes things really easy. Normally it takes maybe an hour for me to complete my taxes. This year was different. I spent about three hours a day for five days trying to enter all the complicated information. And some of the MLP’s operated with other MLPs so basically I had to enter the information three times for a single company. For some reason there was a couple of companies that the Turbo Tax software kept rejecting as errors for me to correct before filing. I spent hours trying to figure out what was wrong but never did find the errors. I don’t know if it was a glitch in the software or what but it drove me crazy.
This week comes the announcement of a MLP I owned cutting its distributions. This was the second time it had cut them this year year. For me, that was the last straw ! I sold all my MLPs that day. I had had enough! The sad thing is I will still have to deal with all those K-1’s again next year when I do my taxes but for now it gave me some satisfaction to have rid myself of them.
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