What does separately stated item mean on the CPA exam?
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Separately stated item. Income, deduction or credit that keeps its own character as it passes through to the owner, because the owner's own situation decides how it is taxed. Everything else is folded into ordinary business income.
Defined against Sec. 702(a).
Worked example
A partnership's year shows sales of $900,000, cost of goods sold of $520,000 and employee salaries of $140,000. It also has a $30,000 long-term capital gain on investment stock, $8,000 of qualified dividends and a $15,000 cash contribution to a public charity. Erin owns 25% and shares every item in that ratio.
What is the partnership's ordinary business income, and what does Erin's Schedule K-1 report?
| Erin's share of the long-term capital gain, stated separately30,000 x 25% | 7,500 |
| Erin's share of the qualified dividends, stated separately8,000 x 25% | 2,000 |
| Erin's share of the charitable contribution, stated separately15,000 x 25% | 3,750 |
| Ordinary business income: sales less cost of goods sold and salaries900,000 - 520,000 - 140,000 | 240,000 |
| Erin's share of ordinary business income240,000 x 25% | 60,000 |
Answer: Ordinary business income is $240,000. Erin's K-1 reports $60,000 of it, plus $7,500 of long-term capital gain, $2,000 of qualified dividends and a $3,750 charitable contribution, each on its own line.
The trap: Netting everything into one figure of $263,000. Each of the three items is stated separately because its tax result depends on the partner: the gain meets Erin's own capital losses, the dividends take her own rate, and the contribution is limited by her own income.
Based on IRC Sec. 702(a); IRC Sec. 703(a).
Which CPA exam sections use separately stated item?
Separately stated item appears in the TCP section of the CPA exam.
Related terms
- dividends-received deduction: A deduction that keeps corporate profit from being taxed three times as it passes between corporations.
- ordinary income: Income taxed at the regular graduated rates rather than at preferential capital gain rates.
- deferred tax liability: The deferred tax consequences of taxable temporary differences: income already in the books that the return has not taxed yet, or a deduction taken on the return ahead of the books.
- qualified business income: The net income from a domestic pass-through trade or business, excluding investment income and reasonable compensation.
- trade or business: An activity carried on regularly, continuously and with a profit motive.
- nonresident alien: An individual who is neither a United States citizen nor a resident under the green card or substantial presence tests.