Extra Credit Assignment Putting It All Together The goal for the project is understand the flow of a partnership return, and to analyze how the items reported by the partnership impact the partner. This assignment is completed using an external tool, ExPrep. Please email if you do not have a current subscription to ExPrep and we can discuss potential solutions. If desired, students without a current subscription to ExPrep may purchase a subscription at www.excelpreparation.com. Assignment Prepare pages one, four and five of Form 1065, U. S. Return of Partnership Income, and related Schedules K-1 (Form 1065) for NIL Limited Partnership for the calendar year ending December 31, 20X8. Highlighted boxes on the worksheet indicate places on the forms requiring numbers or other inputs. All other worksheets in the excel workbook are for your use reconciling and completing the required Form 1065 pages and Schedules K-1. Students may work in pairs to complete the project. No more than two students may work together on the project. Please include both names on your submission. The project is due on Sunday, December 10 at noon. Facts On December 31, 20X7, Kate Winters, LaTonya Dunn, and Alex Evans formed the NIL Limited Partnership to negotiate NIL deals, develop marketing plans, and provide financial planning services for college athletes. The partnership adopts a calendar year and maintains their books and records on the tax basis using the cash basis method of accounting. The partners have equal ownership in the partnership with Alex as the sole general partner. The partnership and partner's identification numbers and addresses are detailed below. NIL Limited Partnership Kate Winters LaTonya Dunn Alex Evans 8000 Crescent Drive Cary, NC 27513 EIN: 12-3456789 SSN: 426-55-1245 SSN: 123-44-5678 145 Masters Drive, Cary, NC 27518 223 Donegal Drive, Apex, NC 27502 3790 Kenan Way, Chapel Hill, NC 27517 SSN: 992-86-7645 Kate contributed $150,000 cash to the partnership in exchange for her partnership interest. LaTonya contributed the following marketable securities to the partnership in exchange for her partnership interest. She took a chance on an up and coming company six years ago called Oscar Inc. and purchased 150 shares. She was so successful; four years ago, she purchased 500 shares of Papa Corporation. Through the years, she accumulated additional stock and purchased Quebec Inc. and Romeo Corporation. Number of shares Adjusted Basis Fair Market Date of Value Acquisition Oscar Inc. Papa 150 shares $3,000 $54,000 1/15/20X1 500 shares $15,000 $36,000 6/15/20X3 Corporation Quebec Inc. 75 shares $12,000 $27,000 9/2/20X6 Romeo 150 shares $18,000 $33,000 3/7/20X7 Corporation Alex contributed the following assets to the partnership in exchange for his partnership interest. He received the land from his grandmother as an inheritance five years ago, and purchased the adjacent outparcel within the last few years. Adjusted Basis Fair Market Land $94,300 Outparcel (land $25,000 #2) Value $112,000 $38,000 Date of Acquisition 4/5/20X2 6/13/20X4 The partnership agreement provides that capital accounts will be maintained, distributions are made in according to positive capital account balances, a deficit in the general partner's account must be restored, and a qualified income offset provision applies to limited partners. Furthermore, the partnership agreement allows the partnership to adopt the traditional method with curative allocations for IRC Sec. 704(c) gains and losses. On January 1, 20X8, the partnership sells the outparcel (land #2) contributed by Alex for $47,000. Additionally, the partnership sells all shares of Papa Corporation for $48,000 on May 21, 20X8, and sells all shares of Romeo Corporation for $24,000 on December 15, 20X8. Assume no change in market value for all other marketable securities owned by the partnership. On January 15, 20X8, the partnership takes out a $225,000 loan with Sierra Bank to construct a building on the contributed land. Although unrealistic, assume the building is constructed and placed-in-service on September 30, 20X8. Sierra Bank financed the loan similar to other loans they have with start-up companies allowing for interest only payments for the first five years, switching to principal and interest amortization in years six through year ten. The loan is secured by the real estate and non-convertible. NIL Limited Partnership uses one-fourth of the new building and rents the remaining square 2 footage as commercial office space. Assume net rental income detailed in the income schedule equals gross income less allocable rental expenses including depreciation. On June 12, 20X8, the partners agree to leverage their marketable securities by taking out a margin loan of $30,000 and investing the proceeds in 250 shares of Tango Inc. The marketable security portfolio collateralizes the loan. The loan is due in nine months unless renewed by the partners. The partnership expends a portion of its cash to purchase an Orange County North Carolina Limited Obligation bond for $25,000, 4.5% coupon, maturing in 2030. In addition, during 20X8 the partnership takes out a $45,000 interest-only loan to purchase computer equipment, furniture, and fixtures. The loan is not secured by the property but rather guaranteed by the partnership. The term of the loan is five-years. As detailed in the financial information below, the partnership deducts the entire cost of the newly purchased fixed assets as a IRC Section 179 expense. As manager of partnership, Alex receives a guaranteed payment of $3,800 per month starting April 1, 20X8 in addition to his distributive share. Lastly, assume the partnership realizes and recognizes the following income, expense, gain, and loss items for 20X8. Gross receipts Ordinary dividends (100% qualified) Tax-exempt income (NC sourced bond) Net rental income from office space Cash charitable contribution to UNC Depreciation on new building Section 179 expense for new fixed assets $225,000 $4,500 $1,125 $12,300 $15,000 $1,500 $45,000 Investment interest expense $2,400 Interest expense-building loan $13,500 Interest expense-computers, etc. $2,700 Federal penalty for failure to make timely payroll deposits $1,230 Repairs and maintenance for business use portion of building $8.760 Salaries to non-owners $87,000 Guaranteed payment to Alex $34,200 Utilities for business use portion of building $11,310 Property taxes for business use portion of building $6,300 Cash distribution to each partner $25,000 ($75,000 total) 3 Name of Partnership: NIL Limited Partnership Form 1065 Line 1a Gross receipts or sales 5 Line 1b Returns and allowances Balance 5 Line 1c Line 2 COGS 3 Line 3 Line 4 Gross profit Line 5 1 Line 6 2 Line 7 3 Line 8 4 Line 9 5 Line 10 6 Line 11 7 Line 12 8 Line 13 Line 14 0 Line 15 1 Line 16c 2 Line 17 3 Line 18 4 Line 19 5 Line 20 6 Line 21 7 Line 22 8 Ordinary income from other partnerships, estates, and trusts Net farm profit (loss) Net gain (loss) from From 4797 Other income Total income (loss) Salaries and wages Guaranteed payments to partners Repairs and maintenance Bad debts Rents Taxes and licenses Interest Depreciation Depletion Retirement plans Employee benefit programs Other deductions-utilities Total deductions Ordinary business income (loss) Amounts Complete cells filled in yellow on all pages. Enter deductions as positive numbers. 1 Name of Partnership: NIL Limited Partnership 2 3 Schedule K 4 5 Line 1 6 Line 2 7 Line 3a 8 Line 3b 9 Line 3c 10 Line 4a 11 Line 4c 12 Line 5 13 Line 6a 14 Line 6b 15 Line 7 16 Line 8 Ordinary business income (loss) Net rental real estate income (loss) Other gross rental income (loss) Expenses from other rental activities Other net rental income (loss) Guaranteed payments (services) Total Guaranteed payments Interest income Ordinary dividends Qualified dividends Royalties Net short-term capital gain (loss) Net long-term capital gain (loss) Collectibles (28% gain) Unrecaptured section 1250 gain Net section 1231 gain (loss) Other income (loss) Section 179 deduction Contributions Investment interest expense Section 59(e)(2) expenditures Other deductions 17 Line 9a 18 Line 9b 19 Line 9c 20 Line 10 21 Line 11 22 Line 12 23 Line 13a 24 Line 13b 25 Line 13c 26 Line 13d 27 Line 14a 49 Line 18a 50 Line 18b 51 Line 18c 52 Line 19a 53 Line 19b 54 Line 20a Investment income 55 Line 20b 56 Line 20c Investment expenses Other items and amounts Net earnings (loss) from self-employment Tax-exempt interest income Other tax-exempt income Nondeductible expenses Distributions of cash and marketable securities Distributions of other property Amounts Enter deductions as positive numbers. 1 Name of Partner: Kate Winters 2 3 Indicate: 4 5 6 7 General partner or LLC member manager Limited partner or other LLC member Domestic partner Foreign partner 8 Partner's share of liabilities at year end: 9 Nonrecourse Qualified nonrecourse 10 11 12 Recourse 13 Partner's capital account analysis 14 15 16 17 18 19 20 21 22 23 24 Schedule K 25 26 Une 1 27 Line 2 28 Une 3 29 Une 43 30 June4c 31 Une 5 32 Une Ga 33 Une 6b 34 Une 7 35 Une 8 36 Une 93 37 Une 9b 38 Line 9c 39 Une 10 Beginning capital account Capital contributed during the year Current year increase (decrease) Withdrawals and distributions Ending capital account Indicate how capital account calculated (Le tax basis, GAAP, 704(b)) Indicate if the partner contributed property with a built in gain or loss? Ordinary business income (loss) Net rental real estate income (loss) Other net rental income (loss) Guaranteed payments (Services) Total Guaranteed payments Interest income Ordinary dividends Qualified dividends Royalties Net short term capital gain (loss) Not long term capital gain (loss) Collectibles (28% gain) Unrecaptured section 1250 gain Net section 1231 gain (loss) Other income (loss) Amounts Equals basis of property contributed. Ending Tax Basis. Other deductions Cash contribution (Code A) Other deductions Investment interest exp (Code H) Self employment earnings (loss) 40 Line 11 41 Une 12 Section 179 deduction 42 Une 13 43 Une 13 44 Line 143 45 Une 15 46 Une 16 47 Line 17 48 Line 18 49 Une 18 50 Une 19 51 Line 20 52 Une 20 53 Line 20 Credits Foreign transactions Alternative minimum tax (AMT) Items Tax exempt income (code A) Nondeductible expenses (Code C) Distributions (Code A) Other information (Code A) Other information (Code B) QBI (Code Z) 54 Une 20 QBI (Code Z) 55 56 equals Line 1 ordinary business income/(loss) less Sec. 179 expense equals Line 2 net rental real estate income/(loss) 1 Name of Partner: LaTonya Dunn 2 3 Indicate: General partner or LLC member manager 4 5 6 Limited partner or other LLC member Domestic partner Foreign partner 7 8 Partner's share of liabilities at year end: 9 Nonrecourse Qualified nonrecourse 10 11 12 Recourse 13 Partner's capital account analysis 14 15 16 17 18 19 20 21 22 Beginning capital account Capital contributed during the year Current year increase (decrease) Withdrawals and distributions Ending capital account Indicate how capital account calculated (Le tax basis, GAAP, 704(b)) Indicate if the partner contributed property with a built in gain or loss? Equals basis of property contributed. Ending Tax Basis. 23 24 Schedule K 25 26 Une 1 27 Line 2 28 Line 3 29 Line 43 30 Une 4c 31 Une 5 32 Une a 33 Line Gb 34 Line 7 35 Une & 36 Line 93 37 Line 9b 38 Une 9c 39 Une 10 40 Une 11 41 Une 12 Ordinary business income (loss) Net rental real estate income (loss) Other net rental income (loss) Guaranteed payments (Services) Total Guaranteed payments Interest income Ordinary dividends Qualified dividends Royalties Not short term capital gain (loss) Not long term capital gain (loss) Collectibles (28% gain) Unrecaptured section 1250 gain Net section 1231 gain (loss) Other income (loss) Section 179 deduction 42 Line 13 43 Une 13 44 Une 143 45 Une 15 46 Une 16 47 Line 17 48 Line 18 49 Une 18 50 Line 19 51 Une 20 52 Une 20 53 Line 20 54 Line 20 Other deductions Cash contribution (Code A) Other deductions Investment interest exp (Code H) Self employment earnings (loss) Credits Foreign transactions Alternative minimum tax (AMT) Items Tax exempt income (code A) Nondeductible expenses (Code C) Distributions (Code A) Other information Code A Other information (Code B) QBI (Code Z) QBI (Code Z) 55 Amounts equals Line 1 ordinary business income/(loss) less Sec. 179 expense equals Line 2 net rental real estate income/(loss) 1 Name of Partner: Alex Evans 2 3 Indicate: 4 5 6 7 General partner or LLC member manager Limited partner or other LLC member Domestic partner Foreign partner 8 Partner's share of liabilities at year end: 9 10 11 12 Nonrecourse Qualified nonrecourse Recourse 13 Partner's capital account analysis 14 15 16 17 18 19 20 21 22 23 24 Schedule K 25 26 Une 1 27 Une 2 28 Une 3 29 Line 43 30 Line 4c 31 Line 5 32 Une 63 33 Une 6b 34 Une 7 36 35 Une 8 Une 93 37 Line 9b 38 Une 9 Beginning capital account Capital contributed during the year Current year increase (decrease) Withdrawals and distributions Ending capital account Indicate how capital account calculated (Le tax basis, GAAP, 704(b) Indicate if the partner contributed property with a built in gain or loss? Ordinary business income (loss) Net rental real estate income (loss) Other net rental income (loss) Guaranteed payments (Services) Total Guaranteed payments Interest income Ordinary dividends Qualified dividends Royalties Net short term capital gain (loss) Net long term capital gain (loss) Collectibles (28% gain) Unrecaptured section 1250 gain Net section 1231 gain (loss) Amounts Equals basis of property contributed. Ending Tax Basis. Section 179 deduction Other deductions Cash contribution (Code A) Other deductions Investment interest exp (Code H) Self employment earnings (loss) Credits Foreign transactions 39 Line 10 40 Une 11 Other income (loss) 41 Une 12 42 Line 13 43 Line 13 44 Une 143 45 Line 15 46 Une 16 47 Une 17 48 Une 18 49 Line 18 50 Une 19 51 Line 20 52 Line 20 53 Line 20 54 Une 20 Alternative minimum tax (AMT) Items Tax exempt income (code A) Nondeductible expenses (Code C) Distributions (Code A) Other Information Code A Other information (Code B) QBI (Code Z) QBI (Code Z) equals Line 1 ordinary business income/(loss) less Sec. 179 expense equals Line 2 net rental real estate income/(loss) Name of Partnership: NIL Limited Partnership Analysis of Net Income (Loss) Net income (loss). Line 1 Line 2 Analysis by partner type: Line 2a General Partners- Line 2b Limited partners Schedule L-Balance Sheet per Books Assets Trade notes and accounts receivable Line 1 Cash Line 2a Line 2b Line 3 Line 4 Line 5 Line 6 Line 7a Line 7b Line 8 Line 9a Line 9b Line 10a Line 10b Line 11 Line 12a Line 12b Less allowance for bad debts Inventories U.S.government obligations Tax-exempt securities Other current assets Loans to partners Mortgage and real estate loans Other investments Buildings and other depreciable assets Less accumulated depreciation Depletable assets Less accumulated depreciation Land Intangible assets Less accumulated amortization Other assets Line 13 Line 14 Total assets Liabilities and Capital Line 15 Line 16 Line 17 Accounts payable Mortgages, notes, bonds payable less than 1 year Other current liabilities Line 18 All nonrecourse loans Line 19a Line 19b Loans from partners (or related persons) Recourse debt Line 20 Other liabilities Line 21 Partners' capital accounts Line 22 Total liabilities and capital Corporate Line C4 should equal line 147. Individual (active) Beginning of tax year (a) (b) Line 1 Line 2 Schedule M-1 Reconciliation of Income (Loss) per Books with Income (Loss) per Return Net income (loss) per books Income included on Schedule K not recorded on books Line 3 Guaranteed payments (other than health insurance) Line 4 Expenses recorded on books this year not included on Schedule K-Nondeductible penalty- Line 5 Add lines 1-4 Schedule M-2 Analysis of Partners' Capital Accounts (Computed on Tax Basis) Balance at beginning of year Line 1 Line 2 Capital contributed: cash Line 2b Line 3 Line 4 Line 5 Capital contributed: property Net income (loss) per books Other increases Add lines 1-4 Individual (passive) Partnership Exempt Organization Nominee/Other End of tax year (c) (d) Line 6 Line 6a Line 7 Income on books this year not included on Schedule K Tax-exempt income Deductions included on Sch K and not charged on books Line 8 Add lines 6 & 7 Line 9 Income (loss) Line 6a Line 6b Distributions: cash Distributions: property Line 7 Other decreases Line 8 Add lines 6 & 7 Line 9 Balance at end of year Line G39 should equal 154.