News & Tech Tips

Why Don't More People Know about MLPs?

Investors are looking everywhere for better yields – but how many of them look into Master Limited Partnerships?

Many investors have never heard of MLPs. Others have, but assume they are complex and esoteric. In reality, investing in MLPs isn’t that mysterious. They trade on public exchanges, and today there are even MLP mutual funds and ETFs.

MLPs have outperformed the S&P 500 in 11 of the past 12 years. In fact, they have left stocks in the dust in terms of annualized total returns. From 2002 to 2011, the average yearly total return for MLPs approached 16 percent, compared to less than 5 percent or less each for the S&P 500* and the DJIA*.1

Look at their yields***. At the end of Q2 2012, MLPs were yielding 6.7 percent. The S&P 500 was yielding 2.2 percent, the 10-year Treasury was yielding 1.6 percent and REITs (3.4 percent) and utilities (4.1 percent) were yielding less.2

Of particular interest is the 5 percent gap between the yields on MLPs and the 10-year note**. Historically, MLPs have done well when this gap is this large. Since 1999, the gap has averaged 3.3 percent.1

Almost all MLPs are pipeline businesses. They make money from the processing or transport of oil, natural gas or coal. Thanks to strict environmental regulations, they don’t face much competition – and as they transport these commodities rather than explore for them, they are theoretically less affected by ongoing volatility in commodity prices.

An MLP weds the tax structure of a limited partnership to the liquidity of a publicly traded security. MLPs are designed to pay out nearly all of their free cash flow to investors in the form of quarterly distributions. As MLPs have big depreciation shields resulting from capital expenditures, 80 percent of their distributions are characterized as tax-deferred return on capital.2

There are demerits resulting from this hybrid construction. MLPs are exempt from corporate taxes, and the taxed part of an MLP distribution is taxed as regular income. The tax-deferred part of the payout reduces your cost basis in MLP shares (which are properly called units), and it is taxable when MLP shares are sold. Appreciation in MLP holdings is subject to corporate tax, and MLP investors get K-1 forms instead of annual 1099s.1

However, MLP funds aren’t required to make distributions on balance with the distribution rate of the underlying partnerships, or indeed any distributions at all. In other works, when times are tough, these distributions can suddenly stop.1

Consequently, MLPs can be problematic for investors with tax-deferred accounts. Expect intensive paperwork at tax time if you own MLP units. Tax benefits from investing in an MLP are contingent on them being considered partnerships for federal income tax purposes. The impact if the MLP is considered a corporation rather than a partnership? In that case, it’s subject to federal taxation, which can diminish the fund’s value.1

MLPs attract income-focused investors who want a hedge. Most people invest in MLPs through a holding company. Select ETFs or mutual funds provide alternate points of entry. Offering potential for attractive yield and depending on your tolerance for risk, you may want to look into this underpublicized investment class.

* Holdings within an MLP differ significantly from the securities held in the S&P500 and DJIA index. These indices are unmanaged and not available for direct investment.

** Government bonds and treasury bills are guaranteed by the U.S. Government and, if held to maturity, all bonds offer both a fixed rate of return and fixed principal value.

*** Annualized dividend yields are historical and will fluctuate and do not guarantee future results.

Citations

1 –online.barrons.com/article/SB50001424053111904081004577434252994880844.html [6/2/12]

2 – www.dailyfinance.com/2012/08/14/mlps-the-low-risk-high-yield-investment-youve-never-heard-of/ [8/14/12]

ADP Enhances Tools for Small Business ACA Compliance

ADP recently introduced additional tools to assist small businesses in complying with the complex provisions of the Affordable Care Act (ACA).

The company has added extra tools and resources to its RUN Powered by ADP human resource and payroll software. Two of the new features — an ACA full-time equivalent calculator and tax-credit assist tools — add to the existing software tools to further help small business owners improve compliance, take advantage of potential tax credits and help determine their status under the ACA’s Shared Responsibility Provision.

The new features complement other small business ACA-related tools and resources available to businesses using ADP’s RUN HR and payroll system, including an ACA Dashboard, which provides tools, reports and links to help clients understand how the ACA affects their business and employees.

ADP’s Pay-by-Pay Premium Payment Program for Workers’ Compensation is another existing tool that helps to manage the cash businesses spend on workers’ compensation premiums.

In addition, A Time-and-Attendance tool provides workforce planning to improve time tracking, apply employee schedules and monitor employee hours to help clients comply with ACA’s employer shared-responsibility provisions.

Furthermore, ADP’s ongoing ACA alerts and education provide regular legislative and regulatory alerts and educational materials, including webinars and updates, to help clients keep apprised of latest ACA developments.

For more information about how ADP can help your business in managing payroll responsibilities, other HR functions and customer payments, contact Kristy Billman at 783-8778 or Matt Banks at 901-7467. ADP is an alliance partner with our firm so make sure to indicate you are a Whalen client to obtain the best pricing and other benefits.

A Compliance Checklist to Checkout

Running a business is filled with regulations that can drain time away from the core of your business. If you ignore them, there may be huge financial consequences. The best way to handle them is to understand your exposure, consult with experts, create a checklist and make sure you’re in compliance.

Brian Stoner, a CPA in Burbank, California, has developed seven compliance items that he believes apply to most businesses and are often overlooked. Go through the list to make sure there aren’t any surprises for your business. If you find some areas where you need some assistance, feel free to contact us, and we’ll help you find out where to get answers.

1. Earned Income Credit (EIC) Notice to Employees
It’s now required annually to notify certain employees about the Earned Income Credit so that more people who need it can take advantage of it. If you have employees, the next deadline for this compliance item is February 7, 2014, and can be met if you get the right W-2 forms. Details are in IRS Publication 15.

2. Corporate Meeting Minutes
Just about the first thing the IRS will ask for in an audit is your corporate meeting minutes. If you are incorporated as a C Corp or S Corp, you need properly formatted and executed documentation of the annual shareholders’ meeting, even if it is just you. The risk in not having it includes a potential increase in tax liability from undocumented deductions.

3. PCI Compliance
PCI stands for Payment Card Industry, and if you take credit cards, you may have compliance requirements under this industry standard. The standard is designed to provide the cardholder with a minimum acceptable level of security, and your requirement is to maintain certain processes and procedures to safeguard the stored credit card data.

4. Document Retention
While it’s a great thing to go paperless, you may get caught by surprise if you are not downloading and preserving the items you used to have on paper. The IRS and other agencies still need proof of these items in order to approve the deduction. This includes invoices that are coming via email in PDFs, bank statements you’ve gone green on, and direct deposit payroll stubs, to name a few.

Fax copies fade after a few years and can catch you by surprise when you go to look up an old record and can no longer read it. It’s best to scan fax receipts in so they will stay readable for the length of the retention period.

You’ll also want to keep up-to-date on how many years it’s necessary to maintain these items in the case of an audit.

5. New Hire Reporting
In a small business, most of us are hiring so infrequently that it’s easy to forget this one. Most state unemployment agencies require that you report new hires within about three weeks of their start date. The purpose of this is to track fathers who have missed child support payments.

6. Changes in State Tax Compliance
As geographic borders disappear and our business expands, we need to regularly re-evaluate state requirements on income, franchise, and sales tax obligations. It can be too easy to “do things the way we’ve always done them” and forget that as our business expands into new territories, new obligations can arise.

If we’ve hired a virtual employee in another state, we may have new obligations. If we’ve earned money during a speaking engagement in another state, we may have income to report in that state. And, of course, if we open new offices in another state, we have new compliance items to deal with.

7. Payroll Posters
Surprisingly, the highest payback item in the list for those of you that have employees may be posting your payroll posters. Compliance usually costs less than $100, and the fines avoided can be as much as $17,000, a pretty big dent, no matter how big your small business is.

IRS Begins the 2014 Tax Season on January 31

The Internal Revenue Service will open the 2014 filing season on January 31, 10 days later than originally planned. The delay is due to the federal government’s partial shutdown for 16 days in October, which caused significant delays in the annual process for updating IRS Systems.

The 2014 start date is one day later than the 2013 filing season opening, one of the shortest tax season in recent years. That delay was due to law changes made by Congress on January 1 under the American Taxpayer Relief Act (ATRA). The extensive set of ATRA tax changes affected many 2012 tax returns.

Despite the late start this year, the April 15 tax deadline, which is set by statute, remains in place. Taxpayers have the option of requesting an automatic six-month extension to file their tax return. The IRS has indicated that it will not process any tax returns before January 31.

According to the IRS, its systems, applications and databases must be updated annually to reflect tax law updates, business process changes and programming updates in time for the start of the filing season.

The October closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.

The IRS says that about 90 percent of its operations were closed during the shutdown, with some major work streams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.

Electronic Filing/Payment Rule Amended for Ohio's CAT Tax

State law was amended in the most recent budget bill to allow Ohio’s Department of Taxation to require annual commercial activity tax (CAT) taxpayers to file and pay electronically for returns filed on or after January 1, 2014.

CAT is an annual tax imposed on the privilege of doing business in Ohio, measured by gross receipts from business activities in Ohio. Businesses with Ohio taxable gross receipts of $150,000 or more per calendar year must register for the CAT, file all the applicable returns and make all corresponding payments.

Taxpayers may file and pay electronically through the Ohio Business Gateway at business.ohio.gov. Alternatively, annual taxpayers may use TeleFile as a means for filing and paying the annual CAT return electronically beginning in April 2014.

For tax periods beginning on January 1, 2014, and thereafter, the annual minimum tax (AMT) is a tiered structure, and taxpayers pay an amount that corresponds with their overall commercial activity. The taxpayer uses the previous calendar year’s taxable gross receipts to determine the current year’s AMT. For more information, please refer to information release CAT 2013-05 – Commercial Activity Tax: Annual Minimum Tax Tiered Structure- Issued October, 2013.

Beginning in calendar year 2013, calendar quarter taxpayers applied the full $1 million exclusion amount to the first calendar quarter return for that calendar year and were eligible to carry forward and apply any unused exclusion amount to subsequent calendar quarters within that same calendar year. Any unused exclusion amount from calendar year 2012 was not able to be carried forward into calendar year 2013.