Let's say you buy 100 units of an MLP for $20 per unit, costing $2,000. Each year, you receive $1 per unit in distributions that are all return of capital. So you receive $100 in income. If this were a normal stock, you'd pay at least 15%, or $15, in taxes on that income. But because it's an MLP and the distribution is a return of capital, you pay zero tax on the distribution. Instead, your cost basis is lowered by the amount of the distribution - in this case $1. So your new cost basis is $19. If you were to sell the units at $25, you'd have a $6 capital gain instead of a $5 one and you would pay capital gains taxes on the $600 in profit rather than $500. Uncle Sam will get his money somehow. But in the case of MLPs, he has to wait until you sell. An investor who bought a $20 per unit MLP that paid $1 per year in distributions could collect tax-deferred income for 20 years. So what happens once your cost basis falls all the way to zero? At that point, the distribution that you collect each year is taxed as a capital gain in the year it is received. Capital gains currently have the same tax rate as dividends. That could change, but it will likely take many years of tax-deferred income before that happens. MLPs can also be used as an estate planning tool. Under current law, an heir who inherits an MLP can step up their cost basis. So let's say your parent bought the MLP at $20 15 years ago and collected tax-deferred income for 15 years. Their cost basis is now $5. At that point, they pass on and you inherit the investment. But now the price is $40. Your new cost basis is reset at $40, and future distributions lower the cost basis from that new $40 level. President-elect Biden's proposed tax policy eliminates the step-up basis so that if you inherited the MLP, your cost basis would be $5, and if you sold at $40, you'd owe tax on $35 in capital gains. Of course, this is still a proposal and not yet a piece of legislation. Even if it passes the House of Representatives, it still has to get through the Senate, which is not a slam dunk - especially if Republicans hold on to their majority. Lastly, as a partner in the business, you receive a K-1 tax statement each year instead of a 1099-DIV like you would for a dividend stock. These K-1s are more complicated and are often amended throughout the year. As a result, your tax professional may charge more for handling K-1s. So in the end, are MLPs really worth it? I believe they are. When you can enjoy an average 7% tax-deferred yield plus potential upside in the beaten-up energy sector, it's worth a little extra paperwork. Good investing, Marc | 
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