Why can cash distributions from MLPs be tax deferred?
A unitholder’s initial tax basis in his or her units will generally be the amount paid for the units. Generally, a unitholder’s basis is adjusted upward by the amount of income allocated to him or her and adjusted downward by the amount of cash distributions received by him or her. In most MLPs, the amount of cash distributions received by a unitholder exceeds the amount of income allocated to the unitholder. A unitholder will pay their taxes based on the amount of income allocated to him or her. The difference between the amount of cash distributions received by a unitholder and the amount of net income allocated to that unitholder will be treated as a “return of capital” to the unitholder and will reduce the unitholder’s basis in the units. Approximately 80% of PVR’s cash distributions are currently treated as a return of capital.
