Master Limited Partnership
A Master Limited Partnership (MLP) is a publicly traded limited partnership structure predominantly used in the US energy infrastructure sector, combining the tax efficiency of a partnership with the liquidity of publicly traded securities, and typically offering high distribution yields tied to fee-based pipeline and midstream revenues.
Master Limited Partnerships were formally established under the Tax Reform Act of 1986, which limited their use to businesses deriving at least 90% of their income from qualifying sources — primarily the exploration, production, and transportation of natural resources, including oil and natural gas pipelines, processing plants, storage terminals, and refineries.
The partnership tax structure is the defining economic feature of MLPs. Unlike a corporation, which pays entity-level corporate income tax before distributing dividends to shareholders, an MLP passes all income, gains, deductions, and losses directly through to its unitholders (the limited partnership equivalent of shareholders). This eliminates double taxation, allowing MLPs to distribute a higher proportion of cash flow to investors than a corporate structure would permit. The general partner (often a publicly traded corporation itself, or a subsidiary of one) manages the partnership and typically holds incentive distribution rights (IDRs) entitling it to an increasing share of distributions once certain distribution thresholds are met.
MLP distributions receive favorable tax treatment at the investor level. A portion of each distribution is typically classified as a 'return of capital' for tax purposes, reducing the unitholder's cost basis rather than being taxable as current income. This defers tax until units are sold, when gains are recaptured. The tax accounting for MLP investments is more complex than for regular stocks — investors receive a Schedule K-1 (rather than a Form 1099) that must be integrated into their personal tax return, which can complicate and delay tax filing.
One important planning consideration: MLPs held in IRAs or other tax-exempt accounts can generate Unrelated Business Taxable Income (UBTI). If UBTI from an MLP held in an IRA exceeds $1,000 in a year, the IRA may owe taxes on that excess — partially defeating the tax-deferral benefit of the IRA wrapper. Investors who want MLP-like exposure in retirement accounts often use MLP-focused mutual funds or ETFs, which avoid the UBTI issue by owning MLP units inside a corporate wrapper.
The MLP sector expanded dramatically during the US shale boom of the 2000s and 2010s as pipeline infrastructure buildout drove demand for capital. A significant restructuring wave began around 2018 as the IDR burden on large MLPs prompted many general partners to acquire limited partners in simplification transactions, eliminating the LP structure in favor of C-corps. Several major midstream companies (Kinder Morgan, Williams Companies, ONEOK) have converted entirely to C-corps, while others remain as MLPs.