Explannation: Dividends vs Partnership Income (ECI)

Here is the cleanest, simplest explanation you will ever read on this topic — with real-life examples so the difference becomes crystal clear.

I’ll compare dividends vs partnership income as if they are two completely different creatures living in the U.S. stock market.

DIVIDENDS vs PARTNERSHIP INCOME (ECI)

Think of it like this:

✅ A regular stock makes you a spectator
✅ An MLP/partnership makes you a business owner

And because of that, the IRS treats you very differently.

1. Dividends – EXAMPLE: Apple Stock (AAPL)

Imagine you buy shares of Apple.

Apple is a corporation, and corporations pay their own taxes.

So when Apple makes profits, the process is:

Step 1 – Apple pays U.S. corporate tax

Step 2 – Apple pays you a dividend

Step 3 – You receive the dividend as a simple payout

You are not sharing in Apple’s business operations.
You’re just receiving a payment because you own shares.

Result

• You receive dividends

• Broker issues Form 1042-S

• Withholding is usually 30%

• No K-1

• You normally do NOT file 1040-NR unless special reasons

2. Partnership Income (ECI) – EXAMPLE: Energy Transfer LP (MLP)

Now imagine you buy units of Energy Transfer LP (ET).
This is an MLP, which is treated as a partnership for tax.

You are no longer a spectator.
The IRS says:

👉 “You are a partner in a U.S. business.”

So when Energy Transfer makes profit:

Step 1 – The partnership does NOT pay tax

Partnerships are pass-through entities.

Step 2 – The profit is passed directly to YOU

Even if they did NOT pay you cash.
This profit is shown on a K-1 Form.

Step 3 – This income is considered ECI (effectively connected income)

Which means:

👉 You are treated as if you earned income from a U.S. business

Step 4 – The IRS requires:

• 1040-NR filing

• Reporting the K-1 partnership income

• Claiming withholding from 1042-S or 8805

Result

You receive:

• K-1 (always)

• 1042-S (usually)

• 8805 (sometimes)

SUPER SIMPLE COMPARISON (with numbers)

Let’s say you invested $10,000.

📌 Example 1: Apple stock (dividends)

Apple pays you:
✅ $300 dividend

IRS rule:
30% withholding unless treaty → $90 withheld

You receive:
✅ 1042-S only
✅ No K-1
✅ No business income
✅ No 1040-NR return required
✅ Taxation is simple and final

📌 Example 2: Energy Transfer MLP (partnership income)

Partnership allocates to you:
✅ $1,500 partnership profit
Even if they do NOT pay you that much cash.

IRS rule:
This is ECI (business income)
So you must file 1040-NR.

Broker/partnership withholds:
✅ $300 withholding (example)
You must claim this on your 1040-NR.

You receive:
✅ K-1 (reporting the $1,500)
✅ 1042-S (reporting tax withheld)
✅ Maybe 8805 (depending on the MLP’s structure)

One-line difference that makes everything clear

Dividend = payment FROM a company to you

You are just an investor receiving cash.
No business taxes. No K-1.

Partnership Income (ECI) = your SHARE of BUSINESS PROFITS

You are treated as a business partner.
Business income “passes through” to you.
You receive a K-1 and must file 1040-NR.

Why MLP income is more “complicated”

Because in MLPs:

• You are considered a partial owner of the business

• Profit flows directly to you

• IRS treats it as U.S. trade or business income

• You must file 1040-NR

• Withholding comes through 1042-S or 8805

This is why your ITIN clients get confused — they are not receiving “dividends”; they are receiving “business income”.

Final Ultra-Simple Analogy