Question

Why is partnership ordinary income not the same as partnership taxable income?

Answer 1

Partnerships are “pass through” entities. A partnership is not subject to federal income tax, however owners are subject to income tax on their share of profits.
There are two different category of income they are ordinary income and separately stated items as their “Partnership taxable income.” These amounts are reported on the partnership tax return and reported to the owners on Schedule K-1s to use in their own income tax returns.
Seperately stated item;
Is an item where the character is a matter of consequence at the partner level.These items are disclosed on separate form in person's tax return and different treatment in terms of deduction and tax rate.
Any item that is not separately stated is part of ordinary income. Ordinary income is gross income minus business operating expenses.
The amount of ordinary income and separately stated items are allocated to each partner based on agreement.However, for taxation purpose it shall be done by item by item basis.
Each owner shall give a schedule K-1 to provide item allocation in the tax return.