Despite recent weakness, there are numerous positives beneath the surface. Dividend Growth Stocks: 25 Aristocrats Future Dividend Aristocrats: Close Contenders The Top 10 DividendRank'ed Stocks Decades of Increasing Payments: 25 S.A.F.E. America’s emissions are moving in a better direction, thanks to the Shale Revolution. All rights reserved. https://sl-advisors.com/wp-content/uploads/2013/04/logo1.jpg. Therefore, treatment of one or more MLPs as a corporation for federal income tax purposes could affect the Fund’s ability to meet its investment objective and would reduce the amount of cash available to pay or distribute to you. Legislative, judicial, or administrative changes and differing interpretations, possibly on a retroactive basis, could negatively impact the value of an investment in MLPs and therefore the value of your investment in the Fund. UBIT is generated when Unrelated Business Taxable Income (UBTI) exceeds $1,000 in a given year, as the tax is designed to prevent unrelated business activity within a tax-exempt vehicle such as an IRA or 401(k).

MLP assets will support the export of crude, liquefied natural gas, petrochemical building blocks, and other energy products as the US solidifies its position as a major energy supplier to the rest of the globe. But AMLP is a C-corp, paying taxes on its earnings before paying out what’s left to holders. Since the November 29th low in the sector, the AEITR has rebounded 12.8%. In recent years, the US has become the world's largest producer of oil and natural gas.

RIC-compliant funds (those that hold less than 25% MLPs) do not pay taxes at the entity level as pass-through entities. Foreign investors can potentially avoid this withholding by buying swaps on MLPs. Products also have different tax characteristics depending on structure (see graphic below). Some MLP Investors Get Taxed Twice and Are You in the Wrong MLP Fund both examine the implications of a tax-paying C-corp for investors. All K-1s are received and processed by the Alerian MLP ETF. Hedging MLPs explained how AMLP is useful as short position, because the tax drag will limit its appreciation to 79% of the market’s whereas it can still fall 100% of the market. The result is that the fund will not perfectly track the underlying securities when it is in a net deferred tax liability status. This differs from most investment companies, which elect to be treated as "regulated investment companies" to avoid paying entity level income taxes. For example, if the underlying securities appreciate by 10%, the fund will only appreciate by 7.9%. Learn how your comment data is processed. If the opposite of freedom is bondage.

These items are detailed each year on a Schedule K-1 sent to the investor. The ETF accrues deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investment.

The good news for ETF investors is that you do not need to worry about UBTI if you are invested in an MLP ETF in a tax-advantaged account like an IRA (Read More). This benefit allows MLPs to return more of their cash flow to investors in the form of a distribution. ALPS Portfolio Solutions Distributor, Inc., a FINRA member, is the distributor for the Fund.

As a result, there is no tax drag on performance, making them attractive for tax-advantaged investors interested in total return. Importantly, an amendment to the bill allows taxpayers to receive a deduction of 20% on qualified business income (QBI) from publicly traded pass-through partnerships, which includes MLPs. MLPs do not pay taxes at the entity level if 90% or more of their income is from qualifying sources which are defined in the Internal Revenue Code to include exploration and production, transportation, and other activities involving any mineral or natural resource. This would reduce the amount of cash available for distribution to the fund which could result in a reduction of the fund’s value.
The weakness in energy infrastructure last year wiped out unrealized gains for AMLP and many other tax-burdened MLP funds.
© 2018 SL Advisors, LLC.

As a partnership, an MLP has no federal income tax liability at the entity level. This week’s piece focuses on the taxation of individual MLP investments with the goal of clearing up common questions and misconceptions from investors, including: What is the MLP tax advantage?

For example, if 80% of a distribution is considered tax-deferred return of capital, then the remaining 20% will be taxed as ordinary income with the 20% QBI deduction mentioned above. Moreover, the mix of hydrocarbons should please almost everybody because it’s moving heavily away from coal and towards cleaner-burning natural gas. Thank you for your interest in ALPS' product and services. Instead, K-1 forms are processed by the product issuer, and they distribute a 1099 form to investors. As a result, a significant portion of fund distributions will typically be treated as a tax-deferred return of capital, with the remainder taxed at qualified dividend rates (which share similar tax treatment as long-term capital gain rates). Please consult your tax advisor for further assistance. ETN coupons are taxed at the ordinary income rate. Save my name, email, and website in this browser for the next time I comment.

Investors buy and sell shares on a secondary market. ALPS Advisors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are affiliated. Rising Rates and MLPs: Not What You Think, MLP Funds Made for Uncle Sam – SL-Advisors. Shares are not individually redeemable. You are now leaving the SL Advisors website. As always, Alerian is not an accounting firm or tax consultant, and this piece does not constitute tax advice. Therefore, it has begun to owe corporate taxes again. This comes about because AMLP is not a conventional ETF, but is a tax-paying C-corp. Anecdotally, it’s clear few investors realize this, because most ETF’s are RIC-compliant and therefore not taxable at the fund level. The reduced corporate tax rate means the tax drag is less than it used to be – and it’s been substantial. As of January 16th it owed $93MM, a cost in addition to and approximately equal to their annual management fee. This notice is provided to you for informational purposes only, and should not be considered tax advice. This information will enable us to route your request to the appropriate person. At the time units are sold, the gain that results from basis reductions is taxed as ordinary income with a 20% income deduction, which is known as “recapture,” while the remaining amount is taxed as a capital gain. It’s important to note that some states do not require you to file state tax returns unless your gross income exceeds a certain amount, which could reduce the number of required state filings. In case we have lost you with the accounting jargon, we have included an example below. © 2010-2020 - ALPS Advisors Inc. - All rights reserved. Natural gas and natural gas liquids broke records in prior years, but this year crude oil production will also breach a previous high.

The remaining percentage that is not considered a tax-deferred return of capital is taxed as ordinary income in the current year. MLPs are controlled by their general partners, which generally have conflicts of interest and limited fiduciary duties to the MLP, which may permit the general partner to favor its own interests over the MLPs. Historically, 70-100% of MLP distributions have been considered a tax-deferred return of capital. The ETF is taxed as a regular corporation and is subject to U.S. federal income tax on taxable income at the corporate tax rate (currently as high as 21%) as well as state and local taxes. This cost basis is then adjusted upward by the proportional income from the partnership and adjusted downward by cash distributions and deductions like depreciation and amortization. When considering MLP investment products, it’s important to keep in mind their tax implications and how they differ from individual MLPs. Since you don’t owe taxes on losses, AMLP’s Deferred Tax Liability (DTL) was eliminated. The benefit you are expected to derive from the Fund’s investment in MLPs depends largely on the MLPs being treated as partnerships for federal income tax purposes. Understanding cost basis for MLPs. The flow-through status of MLPs also holds on the state level, meaning MLP investors are required to pay state income taxes on their allocated portion of income in each state in which the MLP operates. To obtain a prospectus, which contains this and other information, call 1.877.398.8461 or visit www.alpsfunds.com. First of all, MLP access products generally issue a single form 1099, which means you do not receive a Schedule K-1. The reduced corporate tax rate will help, but it’ll still represent a serious drag on returns. Getting the sector right but picking the wrong investment is an avoidable tragedy (see AMLP’s Tax Bondage). Conventionally, you don’t stop to consider whether the ETF you own is taxed like a corporation. […], Your email address will not be published. An important concept in MLP taxation is cost basis, which is defined as the value of an asset for tax purposes. As the market rises, so will their DTL. Tax Freedom Day is that point in the year when you’ve figuratively earned enough to pay all your taxes. From an estate planning perspective, in the event of thedeath of a unitholder, the basis of the inherited units steps up to fair market value on the date of death. On a different topic, the U.S. Energy Information Administration confirmed its forecast of record hydrocarbon production in 2018. The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index (ticker symbol AMZI) (the "Underlying Index"). Investments in securities of MLPs involve risks that differ from an investment in common stock.

The simple way for an energy fund to duck the corporate tax is to broaden its portfolio. As a result of US tax law, MLPs are required to withhold taxes from the distributions of foreign unitholders at the highest individual tax rate (37%).

In addition, the MLP ETF would accrue a deferred tax liability or asset equal to the appreciation in the underlying securities multiplied by the corporate tax rate.

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