Under current law, a business entity with publicly traded interests may be taxed as a partnership if 90 percent or more of its income is derived from qualified sources (Internal Revenue Code section 7704). Qualifying income sources include income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas and oil) and real estate operations. Such entities are commonly referred to as master limited partnerships ("MLPs") or publicly traded partnerships ("PTPs").
According to the National Association of Publicly Traded Partnerships, there are more than 100 MLPs currently being traded on major exchanges. So-called "midstream" oil and gas companies, those focused on gathering, processing, pipelines, and distribution, account for the majority of current MLPs. The total market capital of MLPs is approximately US$445 billion, with the natural resource sector accounting for US$400 billion of that total.
Senators Chris Coons (D-DE), Jerry Moran (R-KS), Debbie Stabenow (D-MI) and Lisa Murkowski (R-AK) recently reintroduced legislation (S. 795) that would extend the MLP ownership structure to include renewable energy power generation projects and renewable transportation fuel projects. The "Master Limited Partnerships Parity Act" would amend the Internal Revenue Code to allow income from wind, biomass, geothermal, solar, municipal waste, hydropower and other renewable projects to be considered as qualifying income for MLPs.
A companion bill was also introduced in the House by Rep. Ted Poe (R-TX). The Administration praised expanding section 7704 to include renewable projects late last year when then-Energy Secretary Steven Chu said the bill would "have a profound effect on capital private investment."
Recently, the bill caught the attention of Senate taxwriters in their quest to rewrite the tax code. The Senate Finance Committee included the proposed legislation in an options paper for reforming tax policies affecting energy and infrastructure. By including Senator Coons’s bill, the Finance Committee at least recognizes that expanding MLPs to include renewables belongs in the universe of ideas for improving the current tax code.
The Chairmen of the Senate Finance Committee and House Ways and Means Committee are committed to pursuing comprehensive tax reform with the goal of advancing a bill later this year. Many are still skeptical that they can overcome the myriad political and policy pitfalls inherent in rewriting the tax code. However, when the committees do start the process of actually considering legislation, expanding MLPs to include renewable projects will be a part of that debate.