Separately Stated Items in a Partnership: What You Need to Know

Partnerships have unique tax reporting requirements, including separately stated items—specific types of income, deductions, or credits that must be reported individually to each partner instead of being combined into the partnership’s overall taxable income. This is necessary because certain tax items affect partners differently based on their individual tax situations.

Understanding these rules ensures compliance with IRS regulations and helps partners maximize tax benefits.

Income That Must Be Separately Stated

Certain types of earnings must be reported individually for each partner rather than as part of the partnership’s total taxable income. Different tax rules apply to various forms of income, impacting each partner’s tax liability differently.

Interest

Interest income must be reported separately because it is taxed differently based on a partner’s tax situation. This includes interest from bank accounts, corporate bonds, government securities, and other investments. The IRS requires this to be stated individually on each partner’s Schedule K-1 (Form 1065) so it is taxed according to the partner’s circumstances.

For example, if a partnership earns $10,000 in interest from corporate bonds and has five equal partners, each partner’s K-1 will reflect $2,000 in interest income. This is reported on the partner’s personal tax return (Form 1040, Schedule B). Some partners may be subject to the Net Investment Income Tax (NIIT) at 3.8% if their modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. Others may offset this income with investment-related expenses.

Dividends

Dividend income must be separately stated because different tax rates apply depending on whether the dividends are qualified or ordinary. Qualified dividends are taxed at long-term capital gains rates of 0%, 15%, or 20%, while ordinary dividends are taxed at regular income tax rates, which can be as high as 37% in 2024.

For instance, if a partnership receives $50,000 in dividends, with $40,000 classified as qualified and $10,000 as ordinary, a partner with a 25% ownership stake would report $10,000 in qualified dividends and $2,500 in ordinary dividends.

Partners holding shares in foreign corporations through the partnership may need to account for foreign tax credits if withholding taxes were applied to the dividends.

Capital Gains

Capital gains from asset sales are reported separately because they are taxed differently depending on whether they are short-term or long-term. Short-term capital gains (from assets held for one year or less) are taxed at ordinary income tax rates, while long-term capital gains benefit from lower rates of 0%, 15%, or 20%, depending on income level.

If a partnership sells land for a $100,000 gain after holding it for three years and has four equal partners, each would report $25,000 in long-term capital gains. If another asset was sold at a loss, the partnership must also separately state the loss, which can offset other capital gains or up to $3,000 of ordinary income per year for an individual partner.

Capital gains may also affect the Alternative Minimum Tax (AMT) or NIIT. If the partnership is involved in real estate, Section 1231 rules may apply, distinguishing between ordinary gains and those eligible for lower tax rates.

Deductions to Disclose Separately

Certain expenses must be reported separately because they have different tax implications for each partner. These deductions are not included in the partnership’s ordinary business income but are passed through to partners, who then claim them individually.

Charitable Contributions

When a partnership donates to a qualified charity, the deduction is separately stated because each partner’s ability to claim it depends on their tax situation. Partners deduct their share of the contribution on Schedule A of Form 1040, subject to individual limitations.

For example, if a partnership donates $20,000 to a 501(c)(3) nonprofit and has four equal partners, each reports a $5,000 charitable deduction. The deduction is generally limited to 60% of the partner’s adjusted gross income (AGI) for cash donations and 30% for donations of appreciated property. Excess amounts can be carried forward for up to five years.

If the partnership donates property, the deduction depends on whether the asset has appreciated. If held for more than a year, the deduction is based on fair market value; otherwise, it is limited to the original cost basis.

Section 179 Expensing

The Section 179 deduction allows businesses to immediately expense qualifying property rather than depreciating it over several years. This must be separately stated because each partner’s ability to claim it depends on their taxable income and Section 179 limits.

For 2024, the maximum Section 179 deduction is $1.22 million, with a phase-out beginning at $3.05 million in total qualifying purchases. If a partnership buys $500,000 in eligible equipment and elects to expense it under Section 179, each of five equal partners would receive a $100,000 allocation.

The deduction is limited to the partner’s taxable income from active business sources. If a partner lacks sufficient taxable income to use their share, the unused portion can be carried forward. Section 179 deductions cannot create a net loss for a partner.

Other Deductions

Certain other expenses must be separately stated due to individual limitations or special tax treatment. These include investment expenses, unreimbursed partner expenses, and specific taxes paid by the partnership that are deductible at the partner level.

For example, if a partnership incurs $30,000 in investment-related expenses, such as advisory or custodial fees, these costs must be separately reported. Each partner’s share is subject to the 2% AGI threshold for miscellaneous itemized deductions, meaning they may not be deductible unless total miscellaneous deductions exceed 2% of AGI.

Unreimbursed partner expenses, such as travel or home office costs required by the partnership agreement, must also be separately stated. These expenses can be deducted on Schedule E of the partner’s tax return if they are considered ordinary and necessary for the partnership’s operations.

Credits at the Individual Partner Level

Tax credits allocated from a partnership must be reported separately because they directly reduce a partner’s tax liability rather than adjusting taxable income. Unlike deductions, which lower taxable income before calculating taxes owed, credits provide a dollar-for-dollar reduction in the final tax bill.

Many partnerships qualify for business-related credits that must be passed through to partners. One example is the Work Opportunity Tax Credit (WOTC), which incentivizes hiring individuals from targeted groups, such as veterans or long-term unemployed individuals. If a partnership claims a $40,000 WOTC and has four equal partners, each receives $10,000 of the credit on their Schedule K-1. Since this is a nonrefundable credit, it can only offset the total tax liability for the year. Any unused portion can typically be carried forward for up to 20 years or back for one year.

Another common credit is the Research & Development (R&D) Tax Credit, which rewards businesses for investing in innovation. If a partnership incurs $100,000 in qualified R&D expenses, it may be eligible for a credit of up to $10,000 (assuming a 10% credit rate). Each partner reports their share and applies it against their tax liability.

Reporting on Partner Returns

Each partner’s share of partnership activity is reported on Schedule K-1 (Form 1065), which connects the partnership’s financial activity to the individual partner’s tax return. Properly incorporating this information into a personal return is essential to avoid errors that could lead to IRS scrutiny or penalties.

State tax considerations add another layer of complexity. Many states require partners to file nonresident tax returns if the partnership operates in multiple jurisdictions. Some states also impose franchise taxes, partnership-level taxes, or require composite tax filings on behalf of partners.