Because LPs are partnerships and not corporations, their income is pass-through, which means it's not subject to "double taxation" from corporate income tax. Therefore, more cash is available for unit holder distributions (which, by law, must consist of the company's entire cash flow after operational, maintenance and debt expenditures are met).
What's more, due to the way limited partnerships work, as much as 90 percent of those taxes are deferred until the unit is sold - a nice perk for investors thinking long term.
But LPs also have their tax drawbacks. For institutional investors, they're an administrative headache, and even individual investors may run into some paperwork-related problems. Dividends paid by LPs held in IRA’s are taxable, unlike common stock dividends paid into the IRAs. In some cases, even state taxes on dividends paid to LP unit holders may be taxed. Holding LPs in an IRA or other tax-deferred account could potentially set off an obscure tax known as the unrelated business taxable income, which is why some funds, such as endowments, avoid MLPs altogether.
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