On Tuesday, May 5, 2015, the Internal Revenue Service (“IRS”) released proposed regulations defining qualifying income for Master Limited Partnerships (“MLPs”). MLPs are publicly traded partnerships that are taxed as a partnership rather than a corporation.

Being taxed as a MLP has many advantages. While shareholders in a corporation face double taxation  ̶  paying taxes first at the corporate level, and then at the personal level when those earnings are received as dividends  ̶  owners of a partnership are taxed only once, when they receive distributions. The absence of taxes at the company level gives MLPs a lower cost of capital than is typically available to corporations, allowing the MLPs to pursue projects that might not be feasible for corporations.

To qualify as a MLP, at least 90% of the entity’s gross income must be “qualifying income.” Previously, there had been no detailed list of what constitutes qualifying income.

These proposed regulations use the term “qualifying activities” to describe activities relating to minerals or natural resources that generate qualifying income. The IRS has now provided an exclusive list of operations that constitute qualifying activities. The activities addressed include exploration, development, mining or production, processing, refining, transportation, and marketing of any natural resource.
Continue Reading New Rules on MLPs & Qualifying Income: What Oil Services and Exploration Companies Need to Know