Corporate dividends and MLP distributions are two forms of company payouts for investors seeking income. While both dividends and distributions provide income, they stem from fundamentally different entity structures and carry distinct tax implications that are crucial for investors to understand.
Demand for income-generating investments has been strong in recent years. Investment income can help offset market volatility and provide a more predictable return stream.
See more: Enterprise (EPD) Raises Distribution, Announces 2Q Buybacks
This is particularly relevant for MLPs, which are in the midst of announcing payouts for the second quarter and are known for offering generous income to investors. Enterprise Products Partners (EPD) was the first to announce a raise to its 2Q25 quarterly distribution. EPD is the third-largest holding in the Alerian MLP ETF (AMLP).
Corporate Dividends
Dividends are the most common form of cash payout distributed by C-corporations. A C-corporation is a traditional business structure that is legally separate from its shareholders.
A key characteristic of corporate dividends is double taxation. The corporation first pays corporate income tax on its profits. Then, the dividends paid out from these after-tax profits are taxed again at the individual shareholder level.
Qualified dividends are taxed at the lower long-term capital gains tax rate. This is as opposed to an individual’s regular income tax rate. Qualified dividends typically include those paid by U.S. companies, or international companies trading on a major U.S. exchange. It’s worth noting there is a holding period requirement for qualified dividends.
Conversely, nonqualified dividends are generally treated the same as other forms of income and taxed at an individual’s higher income rate, according to the IRS.
MLP Distributions: Advantage of the Pass-Through Structure
Income provided by MLPs are called distributions because of the partnership structure. MLPs are predominately found in the energy sector.
Unlike C-corporations, MLPs are pass-through entities. This means they generally do not pay federal income tax at the entity level as long as 90% or more of their gross income is derived from qualifying sources. This pass-through structure allows MLPs to distribute a larger portion of their cash flows directly to investors compared to a similarly profitable C-corporation.
Importantly, MLPs not only provide generous income, they provide tax-advantaged income. As the MLP itself doesn’t pay corporate income tax, investors avoid the double taxation inherent to corporate dividends.
Additionally, MLP distributions are tax-deferred. This means taxes are not paid on the distributions until the investor sells their position.
Each year, MLP unitholders will receive a Schedule K-1 for filing their taxes, which details their portion of the MLP’s income, deductions, etc. Unitholders have to pay taxes on the net income assigned to them on the K-1. The income from MLPs is taxed at the individual’s personal rate with a 20% qualified business income deduction. Historically, the income assigned to investors has typically been modest relative to the distributions paid by the MLP.
MLP unitholders are responsible for paying state income taxes on the portion of income allocated to the unitholder for each individual state in which the MLP operates. However, unless the unitholder owns a large position, the share of allocated income is small, and the unitholder may not have to file in some states due to minimum income thresholds.
Looking for midstream insights in your inbox? Subscribe here to keep a pulse on midstream investing through our weekly updates.
For more news, information, and analysis, visit the Energy Infrastructure Content Hub.
vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP, for which it receives an index licensing fee. However, AMLP is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP.
