What is excluded from portfolio income?

The concept of portfolio income primarily pertains to income generated from investments, such as interest, dividends, and royalties. In contrast, guaranteed payments received by a partner are not classified as portfolio income; they are considered ordinary income. This is because guaranteed payments are compensation for services or the use of capital, reflecting the partner's active participation in the partnership rather than passive investment returns.

Portfolio income typically includes income generated from passive investment activities, meaning that the investor does not materially participate in the earning of that income. In contrast, guaranteed payments arise from a partnership's operational activities and are made regardless of the partnership's income or profits, which is why they fall outside the definition of portfolio income.

The other items listed—royalties not derived in the ordinary course of a trade or business, dividends from accumulated earnings and profits of an S corporation, and interest—are all forms of investment income that explicitly fit within the definition of portfolio income. Each of these involves a return on investment that is generated without active participation in a business or trade, aligning them with the characteristics of portfolio income. Thus, guaranteed payments received by a partner stand apart from these categories and are correctly identified as excluded from portfolio income.