Master limited partnerships provide attractive yields due to the way they operate but come with a number of tax issues. Investors, though, can look at a few MLP exchange traded funds that help limit the tax hassle.
MLPs are publicly traded partnerships known for their “pass-through” feature that help investors generate stable, predictable cash flows, writes Paul Baiocchi for Forbes. Additionally, distributions are largely tax deferred.
Investors, though, are required to pay income taxes in states where the MLP operates and have to report taxes on the K-1 form.
With MLP ETFs, investors won’t have to bother with the K-1 form and will have to fill out the normal form 1099.
However, MLP ETFs that hold more than 25% of their portfolio in MLPs are structured as C-Corporations in order to track an underlying MLP-related index. Due to the C-Corporation structure, they must pay corporate income tax on distributions before passing them to investors. Consequently, MLP ETFs may incur higher fees that would cut into overall performance, leading to an underperformance compared to the underlying benchmark. [A Closer Look at Master Limited Partnership ETFs and ETNs]]