MLPs are a hassle.
music selection: “Misled” — Kool & The Gang
A huge part of my overall strategy over the past several years has relied on having enough passive income to cover my budget. Because of my small portfolio size, I have had to go with some high yielding names to leave enough dry powder for options trades. I’ve done well in the REIT, BDC, Closed End Fund (CEF), and MLP spaces. But MLPs just aren’t the place to be anymore.
The very best MLPs out there have already converted to C-Corp status. By relying on the superior credit rating of the general partner to borrow, they can save enough money to more than justify the cost of paying income taxes on their earnings. At the same time, the requirements to return essentially all earnings to unit holders every year leads to a weak balance sheet. As C-Corps, these companies can retain enough cash to support a robust capitalization plan, grow organically, and still return a large amount of cash to shareholders. It is a win-win.
At the same time, I have found each K-1 I file at tax time takes 30 minutes to an hour to fully declare, even using online tax filing software. Sometimes, the software doesn’t intuitively support a box or code and requires a two to three day back and forth with online customer service. I left accounting work for a reason. I have realized that I have voluntarily taken up “accounting” tasks again only I’m now working for a lower hourly rate than when I was employed! Most of my MLPs are either converted to a C-Corp or have been sold. I appear to have two left. I like one well enough that I might keep it but I’m hoping 2019 is the last tax year I spend several hours at the computer filling out online tax forms.
I still think there is room for owning MLPs but I want to do so via ETFs and CEFs going forward so my earnings are reported on 1099 rather than K-1.
Devour your prey raptors!