What are the tax implications for shareholders, especially regarding MLP tax treatment and potential state tax considerations?

Tax Treatment Overview

Because ENFR is an ETF that holds master‑limited partnership (MLP) interests, its quarterly payout is not treated as a qualified dividend. The $0.38617 per‑share distribution is taxed at the shareholder’s ordinary‑income rate (including any applicable net‑investment‑income tax) rather than at the lower qualified‑dividend rate. In addition, the MLP component of the fund generates a K‑1‑style allocation of income, deductions, and credits that flow through to shareholders. In practice, most investors receive a Form 1099‑DIV showing the distribution as “non‑qualified dividend” and a separate Schedule K‑1 (or an equivalent “pass‑through” statement) that must be reported on Schedule E. The net effect is that the distribution is fully taxable in the year received, and any accrued capital gains inside the ETF are also passed through and taxed at the appropriate long‑term or short‑term rates when realized.

State‑Tax Considerations

State tax treatment varies by jurisdiction. Many states follow the federal classification of the distribution as ordinary income, but a few (e.g., New York, Illinois) have additional “MLP tax” provisions that impose a state‑level tax on the pass‑through income irrespective of federal treatment. Shareholders should also watch for state‑specific withholding rules on MLP‑related income—some states require a withholding tax on the K‑1 portion if the investor is non‑resident. If you hold ENFR in a tax‑advantaged account (IRA, 401(k) or similar), the ordinary‑income character remains, but the tax is deferred (or tax‑free in a Roth) until distribution from the retirement vehicle.

Actionable Implications

- Tax‑efficient placement: Consider holding ENFR in tax‑advantaged accounts to defer or avoid ordinary‑income taxation on the MLP pass‑through. If the ETF is held in a taxable brokerage, allocate a portion of the distribution to cover the higher ordinary‑income tax and any state‑level liability.

- State‑specific planning: Residents of states with MLP‑specific tax rules should estimate the additional state tax on the K‑1 income and, if necessary, make estimated quarterly payments to avoid penalties.

- Portfolio impact: The ordinary‑income nature of the distribution reduces the after‑tax yield relative to a qualified‑dividend ETF. Incorporate the expected tax drag when assessing total return, especially if you’re in a high marginal tax bracket. Adjust position size or consider alternative infrastructure funds with more favorable tax treatment if after‑tax yield is a primary driver.