The Hidden Downside of MLPs

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.

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