Which item must be “separately stated” on the corporation’s Form 1120-S? Advertising revenue. Gross ticket sales. Cost of goods sold. Investment interest.
The correct answer and explanation is:
The correct answer is Investment interest.
Explanation:
Form 1120-S is the tax return filed by S corporations in the U.S. It reports income, deductions, and credits for the corporation. Certain items must be “separately stated” on the Form 1120-S because they can affect shareholders differently, often due to how these items impact their individual tax returns.
Separately stated items are those that retain their character when passed through to shareholders, so shareholders can properly report them on their personal tax returns. These include types of income, deductions, credits, and other items that require special tax treatment at the shareholder level.
Now, looking at the options:
- Advertising revenue – This is typically included in the ordinary business income of the corporation. It is not separately stated because it flows through as part of the ordinary income or loss on Schedule K and is reported on Schedule K-1 accordingly.
- Gross ticket sales – Like advertising revenue, gross ticket sales are part of the corporation’s ordinary income and are not separately stated.
- Cost of goods sold (COGS) – COGS is a deduction used to calculate ordinary business income but is not a separately stated item. It’s reflected in the corporation’s net income or loss.
- Investment interest – Investment interest expense is a separately stated deduction because it has special limitations and treatment on the shareholder’s individual tax returns. It is reported separately so shareholders can apply the correct deduction limits on their own returns. The IRS requires investment interest expense to be separately stated on Schedule K-1 so shareholders can determine how much they can deduct against their investment income.
Summary:
- Investment interest is separately stated on Form 1120-S because it affects shareholders individually and is subject to specific rules.
- Other items like advertising revenue, gross ticket sales, and COGS are part of ordinary business income and expenses and are not separately stated.
This separate reporting ensures accurate pass-through of income and deductions consistent with the tax code’s requirements for S corporations and their shareholders.