Unscripted: Life, Liberty, and the Pursuit of Entrepreneurship pdfdrive com

MLP Partnership Income
Master limited partnerships, or MLPs, are similar to dividend stocks, except
their income is classified as partnership income and/or partnership distributions.
Similar to REITs, MLPs are required to generate 90 percent of their income from
“qualifying” sources, mostly related to the commodity space: oil and gas, energy
production, pipelines, and transportation. Like their counterparts, MLPs are
traded on the open market and offer attractive dividends and relatively favorable
liquidity.
MLP partnership income is considered “pass through” in that their earnings
are not taxed upstream to the corporation, but instead passed downstream to the
partners as if you earned the income yourself. Dividends, or partner
distributions, are classified as “return of capital” and not taxed when received.
The varied distinction between partnership income and distributions can create
some complicated tax implications for MLP unit owners. The IRS treats such
income differently (K1 vs. 1099-DIV) and their proper accounting can be both
messy and costly.
Examples:
AB (AllianceBernstein)
EEP (Enbridge Energy Partners)
MMP
(Magellan Midstream Partners)

---

Bond Interest
Bond interest is payment from loans or debt instruments issued by a
government, corporation, or municipalities. For extending credit to a debtor,
you get paid a “coupon,” or an interest payment at a predetermined interval. For
example, a hundred-dollar loan to ABC Corporation might pay three dollars a
quarter for the next five years, yielding a 12 percent capital return. At the end of
the five years, ABC returns your hundred dollars. The size, rate, term, and
regularity depends on the bond offering. The following debt instruments allow
you to lend money and earn regular interest payments, which is no different
from receiving a regular paycheck, without the work:
Corporate bonds: Corporations issue debt to arbitrage company growth,
borrowing at a lower rate in hopes of achieving a higher rate of return through business
operations.
Sovereign debt: Sovereign debt, or government bonds and notes, are loans
issued by sovereign nations to fund government operations.
Municipal bonds or “munis”: Local governments, counties, and municipalities
borrow money to finance capital expenditures and public projects. While munis offer
lower interest rates than corporate bonds, they are very attractive to high-income
earners because their interest payments are exempt from federal taxes. Also, if you buy
a bond issued within your state, the income is exempt from state and local taxes.
Unfortunately, buying individual bonds can be pricey, depending on their
type and where you buy them. The bond markets aren’t liquid, and as a result,
the bid/ask (buy/sell) spreads can be a huge drain on your effective yield. Also,
the market values of bonds inversely rise and fall with interest rates. If you have
to dump a bond before maturity and in a rising rate environment, expect to
receive less than face value, so much less that your entire investment could end a
loss. Additionally, individual bonds carry default risk: if the issuer goes bankrupt,
bondholders are after stockholders in terms of who takes the haircut.

---