Investors have used master limited partnerships (MLPs) for a long time
to invest in gas and oil businesses. Instead of being subjected to taxes,
Schedule K-1’s are issued to investors that show their share of
the partnership’s income. Each individual investor has the income
generated through an MLP reported on their own tax return, but investments
in oil and gas are have unique deductions that allow for revenue to be
offset for tax purposes.
Unfortunately for those investors, MLPs can have significant tax consequences
once they are sold. While held by investors, MLPs distribute cash based
on their businesses’ revenue to investors, often referred to as
dividends. As long as the investor holds on to their position in MLPs,
they won’t notice the unfavorable tax treatments. With an increasing
number of investors selling off their positions in MLPs due to the declining
oil prices, they are beginning to realize that those tax-free dividends
were actually treated as a reduction in their cost basis, and are recaptured
following the sale.
Generally, the recaptured amount is taxed as regular income rather than
capital gain, and in some cases the entire gain can be taxed. One of the
most difficult aspects of selling the MLP is that there is no way to tell
what the recapture amount will be until it’s reported on the K-1.
Even then, investors can only make an educated guess based on the difference
between income listed on the K-1 and the annual distributions. The complete
details are not available to investors.
Brokers and investment advisers need to properly inform their clients of
the risks associated with MLPs. If you invested in one of these partnerships
without being informed of the potential consequences and suffered financial
loss, contact the securities fraud attorneys at Meyer Wilson today. You
can either call us at 614-705-0951, or
fill out the form on our website for a free case consultation.