Ongoing concern surrounding energy security and the environment have led to sustained Congressional interest in energy tax policy. The 111 th Congress enacted a number of renewable energy tax incentives as part of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ). A number of expiring renewable energy tax provisions were extended through the end of 2011 in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ). As various incentives for renewable energy, renewable fuels, and energy efficiency are scheduled to expire at the end of 2011, the 112 th Congress may want to explore various policy options for encouraging investment in renewable energy. The Obama Administration has also repeatedly emphasized the importance of investments in clean energy technologies and infrastructure. President Obama has noted that clean energy investments can enhance domestic energy security, promote environmental objectives, and create jobs. One barrier to investments in renewable energy projects is that such projects are highly capital intensive. Capital intensive renewable energy projects continue to face a number of challenges with respect to financing. Policymakers have been exploring various options for increasing the availability and decreasing the cost of financing for the renewable energy sector. One option for attracting additional capital to the renewable energy sector that Congress may consider is allowing renewable energy activities access to the master limited partnership (MLP) business structure. This report explores the policy option of extending the master limited partnership (MLP) business structure option to renewable energy facilities and related activities. Before evaluating the policy, this report provides a brief overview of the MLP structure, highlighting notable tax issues. This report also provides background on the legislative origins of the MLP structure, and legislative changes affecting MLPs that have been made in recent years. The final sections of this report highlight how the MLP structure might be able to attract additional capital to the renewable energy sector, while also discussing some potential policy concerns. A master limited partnership (MLPs) is a type of business structure that is taxed as a partnership, but whose ownership interests are traded on financial markets like corporate stock. Being treated as a partnership for tax purposes implies that MLP income is generally subject to only one layer of taxation. Income passes through the partnership to its business owners who pay taxes according to the individual income tax system. Publically traded C corporations, however, are subject to two layers of taxation. Their earnings are taxed once at the corporate level, according to the corporate tax system, and then a second time at the individual-shareholder level when dividend payments are made or capital gains are realized. This leads to the so-called "double taxation" of corporate profits. Businesses may be able to attract more capital at a lower cost by choosing to organize as an MLP than would otherwise be possible. Ownership interests of MLPs, which are known as units to distinguish them from corporate stock, are traded on regulated financial exchanges in the same manner as shares of corporate stock. MLP units are an attractive alternative to corporate stock for individual investors, since the single layer of taxation can result in higher after-tax returns. The higher returns to investors corresponds to lower financing costs for the business. And the ability to have their units traded on public exchanges is attractive to the MLP itself since it grants them access to larger and more liquid sources of capital, which can be used to pursue investments. MLPs are typically formed as a limited partnership consisting of thousands of limited partners and at least one general partner. The limited partners are public investors who provide most of the capital to the MLP in exchange for publically tradable units. MLP units pay a periodic cash distribution similar to a dividend and are traded on the New York Stock Exchange, NASDAQ, American Stock Exchange, or over-the-counter market, like stocks. Unit holders are also allocated a portion (determined by units owned) of the partnership's income, deductions, and credits. When a unit is traded, the buying investor replaces the selling investor as a limited partner in the MLP. Currently, there are over 100 publically traded MLPs, the majority of which are energy related (see Appendix ). The MLP's general partner manages the partnership in exchange for a percentage of the partnership's income, called an incentive distribution right (IDR). The exact percentage that the general partner will receive is agreed to when the MLP is formed, but typically involves a 2% share of some baseline amount of distributable cash flow. The general partner may then receive an increasing share of distributable cash flow above the baseline if the yield on the limited partner's units exceed certain thresholds. This payment structure is thought to compensate the general partner for taking on certain risks and encourage them to manage the MLP in a way that maximizes the return to investors. The general partner may be another (parent) company or a group of individuals. To be an MLP at least 90% of a business's gross income must be considered "qualifying income." Qualifying income generally includes dividends, interest, rents, capital gains, and mining and natural resource income. Income related to the exploration, development, mining or production, processing, refining, transportation, storage, and marketing of any mineral or natural resource falls under the latter income category. Recently, the definition of qualifying income was expanded. The expanded definition includes income from the transportation and storage of certain renewable and alternative fuels, including ethanol and biodiesel, and activities involving industrial source carbon dioxide. MLPs will typically own and operate their actual business assets indirectly through a subsidiary, known as an operating company. Historically, owning business assets indirectly through a separate company reduced the administrative burden associated with MLPs being publically traded. At one point, direct ownership of the assets might have required that an MLP file change of ownership documents in every state it had operations in whenever investors traded shares. Today, operating companies are often used by MLPs to limit liability among various ventures operating in different states. The use of an operating company also gives MLPs more options and protection when structuring its debt financing since it can subordinate and separate debt along its various lines of business more easily. Additionally, MLPs can use an operating company to "filter" income generated by a subsidiary that would otherwise violate the qualified MLP income restrictions. This can happen when an MLP has business investments in closely related, but unqualified, lines of business. Although MLP units trade alongside corporate stocks on public exchanges, their tax treatment is fundamentally more complex. This treatment potentially limits the investor pool to the most sophisticated investors. As previously mentioned, each year MLP investors are allocated their share of the partnership's income, deductions, and credits, and pay tax on the net income according to ordinary income tax rate. Tax must be paid on partnership income the year it is earned, regardless of whether the net income was actually distributed to investors or retained within the partnership. If an investor's net income is negative then the loss is considered a passive loss and generally can only be used to offset passive income. Thus, an investor generally could not use a $10,000 loss from an MLP to offset $10,000 of salary income, which is considered active income. In addition, MLP passive activity loss rules are applied on an entity-by-entity basis. Thus, losses from one MLP cannot be used to offset active income from another MLP. The taxation of an investor's periodic cash distributions is different than the taxation of their share of partnership income. Cash distributions may be received on a quarterly basis but they are not taxed until the investor sells their MLP units. Furthermore, when the distributions are taxed, they are generally taxed as capital gains and not ordinary income. To compute the capital gain related to distributions an investor will begin with the unit sales price and subtract their adjusted basis in the MLP. An investor's adjusted basis is the original purchase price of the units decreased by the amount of cash distributions received and increased by their share of the partnership's net income. The basis adjustments ensure that all income is only subject to one layer of taxation. Investors may also have to make various other tax computations when they sell units, including determining their share of depreciation deductions that are subject to recapture (taxation). Another potential tax complexity that may limit who invests in MLPs is unrelated business income taxation (UBIT). The term "unrelated business income" generally means income generated by a tax-exempt organization that is unrelated to the organization's regular business. With regard to MLPs, the issue of UBIT primarily concerns pension funds and tax-preferred accounts such as IRAs and college savings plans that invest in MLPs. These tax-preferred investment and saving vehicles must recognize any income greater than $1,000 earned from MLP investments as unrelated business income and pay tax on that income (UBIT). Unrelated business income is taxed according to the corporate rate schedule. The effect on the after-tax return for pension funds and individuals using IRAs may limit these investors in MLPs. The President's 2010, 2011, and 2012 Budget Outlines along with numerous other proposals in prior Congresses proposed changes to the tax treatment of certain types of "carried interest," which some have been concerned would impact energy-related MLPs. Carried interest refers to the percentage of a partnership's earnings that its general partners (managers) receive as a performance fee. Proposals regarding carried interest have generally been aimed at the financial services industries. Hedge funds and private equity funds, which are typically set up as a partnership, pay management a fee that depends on the performance of the fund. This fee, which represents carried interest, is taxed at the more favorable capital gains rate instead of the ordinary income rates since these firms are involved in the buying and selling of financial assets, which results in capital gains. Past Administration and congressional proposals would have taxed carried interest as ordinary income, stating that the payments represent compensation for services and not capital.