How a Master Limited Partnership Can Reduce Tax Burdens for Energy Investors

Many active, informed investors still focus on energy, regardless of how challenging the field can seem, at times. Thanks to a variety of historical happenstances and other developments that are still ongoing, the energy sector remains one where an especially insightful and determined investor can produce some impressive returns. Doing so typically requires understanding the various details and complexities at a level which might be unaccustomed to those who have not yet experienced energy investing. On the other hand, the rewards for those who work through these challenges can be impressive enough that there will be rarely be a lack of incentive to put in the work.

Many investors who focus on energy, for example, have discovered how master limited partnership structures can be especially interesting and worth investigating further. This style of investment-oriented entity carries with it a number of important advantages, not least of which is the ability to shield many kinds of gains from taxation. Just as the oil depletion allowances that have for so long been enjoyed by many petroleum producers can produce some eye-popping reductions in tax burdens, so can the right master limited partnership do more or less the same for its investors.

With the IRS generally viewing the depreciation allowances that are afforded to investors as the return of capital that was previously invested, there will rarely be a need to pay taxes up front. That alone can certainly be helpful, as it means that investors can legally structure their tax situations with much greater control, predictability, and effectiveness.

Even more importantly, though, distributions that are received as a result of ownership can then be used to reduce the cost basis associated with master limited partnership involvement. Because of this, the tax-relevant basis for a partnership will tend to drop steadily over time, even to the point of declining to zero, in the end. As a result, some investors will find themselves paying taxes on only a tiny fraction of the returns that are produced, regardless of other developments. When new details emerged recently regarding three of the top performing master limited partnerships of recent times, many investors who had previously not heard about this option therefore became extremely interested right away.