Phil Smith and Kate Jones formed the P&K General Partnership on March 1, 2014 to provide computer consulting services. Partnership profits and losses are allocated 60% to Phil and 40% to Kate. The business code and employer identification numbers are 514519 and 24-3897625, respectively. The business office is located at 3010 East Apple Street, Atlanta, Georgia 30304. Phil and Kate live nearby at 1521 South Elm Street and 3315 East Apple Street, respectively. Their Social Security Numbers are 403-16-5110 for Phil and 518-72-9147 for Kate.

The calendar year, cash basis partnership’s December 31, 2020 balance sheet and December 31, 2021 trial balance (both prepared for tax purposes) contain the following information:

Balance Sheet		Trial Balance
12/31/2020		12/31/2021
Debit	Credit	Debit	Credit
Cash	12,000	22,000
Investments (1)	14,000	14,000
Equipment (2, 3)	150,000	190,000
Accumulated depreciation	38,000	63,500
Recourse notes payable (4)	58,000	87,200
Nonrecouse notes payable	36,000	30,000
Phil, capital	28,000	28,000
Phil, drawing (5)	25,440
Kate, capital	16,000	16,000
Kate, drawing (5)	16,960
Revenues	235,000
Dividend income (1)	1,000
Interest income (1)	400
Section 1245 gain (depreciation recapture) (2)	3,500
Compensation (6)	110,000
Rent expense	12,000
Interest expense	16,600
Tax expense (property and payroll)	13,800
Repair expense	5,800
MACRS depreciation	29,200
Health insurance expense (7)	1,600
Property insurance expense	1,500
Office supplies expense	3,000
Utility expense	2,200
Charitable contributions	500
Total	176,000	176,000	464,600	464,400

Notes:

1. The investment account consists of marketable securities of U.S. corporations and U.S. Treasury Bonds. All of the dividends are considered qualified dividends.
2. Equipment was sold May 12, 2021 for $9,800. It was purchased new on May 1 of the prior year for $10,000 and its basis when sold was $6,300.
3. New equipment was purchased March 1, 2021 with $5,000 cash and a $35,000 three-year recourse note payable. The first note payment is March 1, 2022. (Note: the correct amount of tax depreciation is included in the depreciation expense account in the trial balance).
4. Notes payable are long-term except for $20,000 of the recourse notes to be paid next year. All liabilities were created by the partnership.
5. The partners’ drawing accounts record cash distributions made to the partners throughout the year.
6. Compensation is composed of guaranteed payments of $30,000 each to Phil and to Kate and $50,000 to unrelated employees.
7. Health insurance premiums paid were for unrelated employees.

Task:

Prepare a 2021 Form 1065. Complete all pages, including responses to all questions. If any necessary information is missing in the problem, assume a logical answer and record it. Use the worksheet for Figuring Net Earnings (Loss) from Self-Employment included in the 1065 instructions to calculate the partners’ self-employment income.