Question

Which one of the following is an example of a special allocation of partnership income?

1) The Schedule K-1 reports each partner's share of the information they need in order to calculate the § 199A (qualified business income) deduction.
2) The partnership's capital gains and losses are shown separately on Schedule K-1.
3) The partnership agreement provides that Marcus will report all charitable contributions rather than his 20
4) Distributions from the partnership to the partner are shown on Schedule K-1 line 20.
5) None of these items are special allocations.

Answer 1

Option 3, where Marcus will report all charitable contributions regardless of his 20% share, exemplifies a special allocation of partnership income.

Step-by-step explanation:

An example of a special allocation of partnership income is when the partnership agreement provides that a specific partner will report an amount of income, deduction, credit, or other tax item rather than their proportional share based on ownership interest.

In this case, option 3, where the partnership agreement provides that Marcus will report all charitable contributions rather than his ordinarily calculated 20% share, is a clear example of a special allocation. Such allocations are allowed under the U.S. tax law and must be substantiated by the partnership agreement, reflecting the economic arrangement of the partners.