This from Penny Sleuth:

In the corporate tax world, one dreaded phrase reappears when you talk about dividends: “Double Taxation”. All incorporated companies are taxed on the income they make. The shareholders are taxed again on any dividend distribution they receive from the company. So the same income is taxed twice. But, there is a way around it…

Master Limited Partnerships, or MLPs, are nearly identical to royalty income trusts. The only difference between them is double taxation.

Regular trusts must pay taxes on income before it is distributed to shareholders. Those shareholders also have to pay taxes on the already-taxed income when they receive it. MLPs, on the other hand, are limited partnerships. Therefore, they pay no taxes.

Only unitholders, as owners of MLPs are called, are responsible for paying taxes on the income they receive from the partnership.

MLPs are usually trusts comprised of natural resource, financial services, and real estate assets. Many own oil and gas wells, refineries, or pipelines. Others own hotels, restaurants and stores – much like REITs. Still others own certain assets like royalties in gold or copper mines. Some specialize in certain countries or regions, while others are more diversified.

One downside of MLPs is you shouldn’t invest in them through IRAs or other tax deferred accounts. Since they already receive a tax benefit, many IRAs won’t include them. Those that do, could complicate the tax scheme.

MLPs don’t send 1099 forms like most trusts and other investments. Instead, they send out Schedule K-1 Forms at the end of the year, which will describe the unitholder’s allocated income, gains/losses, deductions, and credits. You can use any losses in these as passive losses to offset other income during the year for taxes.

While this isn’t a complete tax shelter for your investment cash, it does one important thing. Since the partnership itself isn’t taxed, the yield is higher, you receive more of your share of the profits without the tax man touching it, and you are still able to use any losses to offset your other gains.

Most MLPs offer safe investments, such as the resource royalty ones. The partnerships themselves offer you cash flow straight from real operating assets without any of the overhead, since the royalty MLPs aren’t actually the ones operating.

Another advantage of MLPs are the many small-cap options you have. There are hundreds of MLPs with market caps below $1.5 billion. Below are our favorites…

Top 5 Small-Cap Master Limited Partnerships:

• Genesis Energy L.P. (AMEX:GEL) – general oil and gas conglomerate operating in supply and logistics, refinery, and pipeline sectors.
• Penn Virginia GP Holdings L.P. (NYSE:PVG) – manages coal and natural gas properties in Illinois, Kentucky, New Mexico, Virginia, and West Virginia.
• Pope Resources L.P. (NASDAQ:POPE) – owns and operates timberland and is involved in the property management.
• Magellan Midstream Partners L.P. (NASDAQ:MMP) – involved in the marketing, supply, and distribution of propane, natural gas, liquefied natural gas, and petroleum gas.
• Quicksilver Gas Services L.P. (NYSE:KGS) – engaged in gathering and processing of natural gas and liquefied natural gas.

All of these should provide investors with years of income, without the burden of “Double Taxation”.

Source: Top 5 Small-Cap Master Limited Partnerships (MLPs)

Today, 88 businesses qualify for this exemption under the government’s rules. They are all publicly traded. The government calls these stocks “master limited partnerships” (MLPs) or “publicly traded partnerships” (PTPs).

Eighty-five percent of MLPs are in the energy business. Two-thirds of these energy companies operate pipelines. The rest run miscellaneous “midstream” energy businesses – things like refining, compressing, pumping, and field gathering. Only 15% of MLPs are outside the energy sector.

You likely know several MLPs already. Kinder Morgan used to be part of Enron. It’s an MLP. And though you’ve probably heard of Blackstone Group and its private-equity operations, you may not know Blackstone is also structured as an MLP. Carl Icahn’s business – Icahn Enterprises – is an MLP, too. (For a full list of MLPs, see the website of the National Association of Publicly Traded Partnerships at www.naptp.org.)

I like MLPs as an investment. One of the secrets of income investing is avoiding tax. When you avoid tax, you generate higher returns without taking on more risk. Besides, MLPs invest in infrastructure. The population of the United States grows every year. Population growth supports 8% average annual MLP market growth.

But here’s the thing: I think MLPs are going to beat almost all other income investments over the next two years for another reason altogether:

Canada.

The income-trust market in Canada is almost identical to the MLP sector in the United States. Canadian income trusts pay no tax, they distribute all their earnings in dividends, and they operate mostly in the commodity and energy sectors.

In other words, MLPs compete directly with Canadian income trusts for investment.

Millions of income investors, pension funds, retirees, and other dividend hogs have enjoyed these trusts’ high dividends over the last 20 years.

But on October 31, 2006, the Canadian government changed the law. It ended the Canadian income-trust structure. Existing trusts have until January 1, 2011 to convert back to corporations, begin paying corporate taxes again, and cut their dividends.

MLPs are the perfect substitute. Yield hogs will turn their attention to MLPs as the 2011 deadline approaches.

Right now, MLPs are paying 7.4%. A 10-year Treasury note pays only 4%. The “spread,” or difference, is 3.4%. This spread is the largest it’s been in five years. That means MLPs are as cheap as they’ve been since 2003.

North American Pipeline MLP Yields Versus
10-Year Treasury Bonds

If nothing changes, MLPs will keep generating 7.4% dividend yields. Add that to 8% industry growth, and we’ll make total annual returns of 16% – matching returns of the last 18 years.

But when you take into account the demise of the Canadian income trusts… I think MLP investors could easily see 25% annual returns over the next couple of years.

Good investing,

Tom

P.S. I’ve found the best way to invest in MLPs. It’s a basket of these investments, it pays a 6.5% dividend yield… and you can buy it at a discount to its net asset value. Here’s something else: You won’t have to worry about tax paperwork associated with MLPs because the SEC considers this investment a regular stock for tax purposes…

I recently published a report on this investment for readers of my advisory The 12% Letter. Click here to learn more about The 12% Letter.

Source: Canada’s Loss Will Make These U.S. Stocks Soar