limited master partnership

Will MLP Tax Benefits Vanish under Obama?

As investors prepare for president elect Obama to take office, many are anticipating any policy changes or modifications he may implement.  Unfortunately, this period of uncertainty has spawned a few rumors that have misled the investing public.  One of these rumors is the idea that Master Limited Partnerships (MLPs) will be taxed in the same manner as C corporations moving forward.

Luckily, according to the National Association of Publicly Traded Partnerships this is not the case.  Per the NAPTP:

…a memo circulated by an investment firm that was based on the Tax Policy Center analysis described below but like other summaries we have seen, neglected to include the all-important word “financial”.   The investment firm has admitted that this was an error.   Therefore, it continues to be true that the only matter involving PTPs on which the President-elect has taken a public position is his cosponsorship of legislation–which has gone nowhere–to tax PTPs which are investment advisors as corporations. We have no reason to believe that he has taken any position with regard to other PTPs.

So, looks like we’re in the clear for now.  The only publicly traded partnerships Obama has considered are “financial” in nature.  In my opinion, it just doesn’t make sense to go after MLPs.  It is in the best interest of the nation to promote building and maintaining quality energy infrastructure - the tax benefits of master limited partnerships encourage this.

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Kiplinger’s on Crosstex Energy LP

The December issue of Kiplinger’s Personal Finance magazine has an interesting article on finding value in today’s current market.  Specifically, the article mentions the rapid decline in commodity prices (such as natural gas) as speculators flee investments in the energy market due to weak demand.

As a result, some pipeline companies (which actually have limited exposure to these prices) have unduly suffered.  For example, Crosstex Energy LP (XTEX) has fallen over 70% since July - even though it has continued to grow cash distributions to investors.  While it had a rough 3rd quarter due to major Hurricanes, at a price of $8 Crosstex has a whopping 25% distribution yield!  However, I like to see a coverage ratio close to 1.3x - Crosstex is below this benchmark with a coverage of around 1x.  Still, bottom line is the same - the market is likely undervaluing some of these companies as commodity prices fall.

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Obama Wins: Goodbye GOP, Hello MLP

Now that Obama has secured his spot as the nation’s 44th commander and chief, investors have one thing on the brain: taxes.  Especially investors in dividend stocks, who see little chance that tax cuts put in place by George W. Bush will be extended.  Instead, the tax rate on dividends paid to investors will likely revert to a painful 35%!  Isn’t it bad enough that dividends are taxed twice?  Ouch.

Investors in Master Limited Partnerships, however, are finding themselves in a much more favorable position.  MLP distributions are not actually considered dividends.  In fact, they dodge the tax bullet in this case because they are considered a tax-deferred return of capital.  So, hold on to your hats - with yields between 7 - 10% MLPs may soon become as popular as the ETF.

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