President Biden is floating the largest tax increase in three decades – a plan that will surely draw strong opposition from the GOP. It may not plague income-heavy energy assets however, like master limited partnerships and the ALPS Alerian MLP ETF (NYSEArca: AMLP).
AMLP seeks investment results that correspond generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index. The index is comprised of energy infrastructure MLPs that earn a majority of their cash flow from the transportation, storage, and processing of energy commodities.
Many shale producers “will still be in a position to extend their ‘tax holiday’ thanks to several tax provisions that could help them increase liquidity by reducing tax liability, producing tax refunds or deferring certain tax payments,” reports OilPrice.com. “These include several established tax provisions as well as new tax changes in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.”
AMLP Tax Talk
MLPs are publicly traded partnerships known for a ‘pass-through’ feature that helps investors generate stable, predictable cash flows. Investors are required to pay income taxes in states where the MLP operates and report taxes on the K-1 form.
MLPs have become very popular in recent years for two reasons: (1) required quarterly distributions provide a steady stream of current income, and (2) because they are partnerships, MLPs avoid corporate income taxes at both the federal and state level as the the tax liability is passed through to the individual partners.
There are some big tax breaks that come along with the MLP income distribution structure that income investors may want to consider.
“The biggest draw of MLPs is that they are considered pass-through entities under the U.S. federal tax code. Whereas most corporate earnings are taxed twice (first through earnings and again through dividends), pass-through status of MLPs allows them to avoid this double taxation because earnings are not taxed at the corporate level. Another key benefit: Midstream MLPs act as toll collectors for the energy companies that use their pipelines. As such, their cash flows are protected by long-term, take-or-pay agreements, meaning they are less susceptible to commodity price fluctuations,” according to OilPrice.
Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
