Why Aren’t All Partnership Items Reported Together?

Partnerships file an annual information return, but unlike corporations, they are not subject to entity-level tax. Instead, income, deductions, credits, and other items flow through to the partners under IRC §702(a). However, not all items are treated the same for tax purposes. Some must be “separately stated” because their treatment depends on each partner’s individual tax circumstances.

In other words, while ordinary business income can be reported as a lump sum, items like capital gains, charitable contributions, and foreign tax credits may have very different consequences depending on who the partner is. For that reason, the partnership must identify and pass these items through separately.

What Counts as a Separately Stated Item?

The Code and regulations identify a list of items that must be disclosed separately on a partner’s Schedule K-1, including:

• Short-term and long-term capital gains and losses
• Section 1231 gains and losses
• Charitable contributions
• Dividends (qualified or otherwise)
• Foreign taxes paid or accrued
• Tax-exempt interest
• Other items identified in the regulations at Treas. Reg. §1.702-1(a)(8)(i)-(ii)

Each of these can impact a partner’s tax liability in different ways, so they cannot simply be included in the “bottom line” partnership income.

Example: Why Separate Reporting Matters

Imagine a partnership with two equal partners. The partnership earns $100,000 of ordinary business income and also realizes a $20,000 long-term capital gain.

• If everything were lumped together, each partner would be allocated $60,000 of “income.”
• But that would obscure the fact that $10,000 of each partner’s allocation is a capital gain.

For a partner in the 15% capital gains bracket, that $10,000 is taxed more favorably than ordinary income. For a partner with capital losses from other investments, that $10,000 might offset those losses. The Code requires that this item be separately stated so each partner can apply their own tax situation correctly.

Example: Charitable Contributions

Suppose the same partnership donates $10,000 to a qualified charity. The deduction must be reported separately because it is subject to each partner’s own §170 limitations (generally based on adjusted gross income). Partner A, with significant AGI, may deduct the full $5,000 share. Partner B, with limited AGI, may only deduct a portion this year and carry the rest forward. Without separate reporting, this individualized limitation would be impossible to apply.

The Bottom Line

Separately stated items under IRC §702(a) ensure that each partner’s distributive share reflects the real tax consequences applicable to them individually. While it adds complexity to partnership reporting, it is a necessary safeguard to make sure tax rules apply fairly and consistently.