The KL Partnership is owned equally by Kayla and Lisa. At the beginning of the year, Kayla's tax basis in her KL interest is $20,000 and Lisa's tax basis is $15,000. Partnership debt did not change from the beginning to the end of the tax year. KL reported the following income and expenses for the current tax year. Assume total assets are $680,400. Sales revenue Cost of sales $150,000 80,000 15,000 Distribution to Lisa Depreciation expense Utilities 20,000 14,000 Rent expense 18,000 6,000 Long-term capital gain Payment to Mercy Hospital for Kayla's medical expenses 12,000 a. Complete whether the following items are reported on Form 1065, page 1 or on Form 1065, Page 4, Schedule K. Sales revenue Form 1065, page 1 Cost of sales Form 1065, page 1 Distribution to Lisa Form 1065, Page 4, Schedule K Depreciation expense Utilities Form 1065, page 1 Form 1065, page 1 Form 1065, page 1 Rent expense Long-term capital gain Form 1065, Page 4, Schedule K Payment to Mercy Hospital for Kayla's medical expenses Form 1065, Page 4, Schedule K How much is the partnership's ordinary income on page 1? 18,000 $ What amount is shown on lines 1, 9a and 19(a) on Schedule K? Line 1: $ 18,000 Line 9a: $ 6,000 Line 19(a): $ 27,000 OMB No. 1545-0123 2019 Form 1065 Department of the U.S. Return of Partnership Income Treasury Internal For calendar year 2019, or tax year beginning ----, 2019, ending ----,20 Revenue Service Go to www.irs.gov/Form 1065 for instructions and the latest information. A Principal business Name of partnership activity KL Partnership B Principal product or Number, street, and room or suite no. If a P.O. box, see the service Type or instructions. Print D Employer identification number E Date business started return C Business code number City or town, state or province, country, and ZIP or foreign postal code F Total assets (see the instructions) $ 680,400 G Check applicable boxes: (1) Initial (2) Final (3) Name change (4) Address (5) Amended return return change HCheck accounting method: (1) Cash (2) Accrual (3) Other (specify) I Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year 2 I Check if Schedules C and M-3 are attached.. Caution: Include only trade or business income and expenses on lines la through 22 below. See the instructions for more information. Gross receipts or sales la 1a 150,000 b Returns and allowances. 1b c Balance. Subtract line 1b from line 1a. 1c 150,000 2 Cost of goods sold (attach Form 1125-A) 2 80,000 3 Gross profit. Subtract line 2 from line 1c. 3 70,000 Income 4 5 6 7 4 Ordinary income (loss) from other partnerships, estates, and trusts (attach statement) 5 Net farm profit (loss) (attach Schedule F (Form 1040 or 1040-SR)) 6 Net gain (loss) from Form 4797, Part II, line 17 (attach Form 4797) 7 Other income (loss) (attach statement) 8 Total income (loss). Combine lines 3 through 7 9 Salaries and wages (other than to partners) (less employment credits) 10 Guaranteed payments to partners ... 11 Repairs and maintenance 12 Bad debts 8 70,000 9 10 11 12 13 Rent .. 13 18,000 14 14 Taxes and licenses... 15 fo the instructions for imitations) Interest (see instructions) 15 15 16a Depreciation (if required, attach Form 4562) 16a 20,000 16b 16c 20,000 Deductions 17 b Less depreciation reported on Form 1125-A and elsewhere on return 17 Depletion (Do not deduct oil and gas depletion.) 18 Retirement plans, etc ....... Employee benefit programs 18 19 19 20 Other deductions (attach statement) 20 14,000 21 23 24 Tax and Payments 25 26 28 29 21 Total deductions. Add the amounts shown in the far right column for lines 9 through 20....... 52,000 22 Ordinary business income (loss). Subtract line 21 from line 8. 22 18,000 23 Interest due under the look back method-completed long-term contracts (attach Form 8697) 24 Interest due under the look back methodincome forecast method (attach Form 8866) 25 BBA AAR imputed underpayment (see instructions) 26 Other taxes (see instructions)...... 27 Total balance due. Add lines 23 through 26 27 28 Payment (see instructions) 29 Amount owed. If line 28 is smaller than line 27, enter amount owed 30 Overpayment. If line 28 is larger than line 27, enter overpayment... 30 Sign Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and Here to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than partner or limited liability company member) is based on all information of which preparer has any knowledge. May the IRS discuss this return with the preparer shown below? See instructions. Yes No Signature of partner or limited liability company member Date Print/Type preparer's name Paid Preparer's signature Date Check if self- PTIN employed Preparer Firm's name Firm's EIN Use Only Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11390Z Form 1065 (2019) Page 4 Total amount 1 18,000 Form 1065 (2019) KL Partnership Schedule K Partners' Distributive Share Items 1 Ordinary business income (loss) (page 1, line 22) 2 Net rental real estate income (loss) (attach Form 8825) 3a Other gross rental income (loss).. b Expenses from other rental activities (attach statement). 2 3a 3b c Other net rental income (loss). Subtract line 3b from line 3a 3c 0 4 Guaranteed payments! 4 a Services 4a b Capital 4b Es) c Total. Add lines 4a and 4b 4c 5 5 Interest income...... Income (Loss 6c | 7 8 9a 6,000 6 Dividends and dividend equivalents: a Ordinary dividends b Qualified dividends 6b c Dividend equivalents 7 Royalties ........ 8 Net short-term capital gain (loss) (attach Schedule D (Form 1065)) 9a Net long-term capital gain (loss) (attach Schedule D (Form 1065)) b Collectibles (28%) gain (loss). c Unrecaptured section 1250 gain (attach statement) 10 Net section 1231 gain (loss) (attach Form 4797) 11 Other income (loss) (see instructions) Type E 12 Section 179 deduction (attach Form 4562) 13a Contributions ........ 9b 9c 10 11 12 13a Deductions b Investment interest expense. 13b c Section 59(e)(2) expenditures: (1) Type (2) Amount 13c(2) 13d 14a 18,000 Self- Employ ment 14b 14c 15a 15b 15c Credits 15d 15e d Other deductions (see instructions) Type - 14a Net earnings (loss) from self-employment. b Gross farming or fishing income.. Gross nonfarm income....... 15a Low-income housing credit (section 42G)(5)) b Low-income housing credit (other). Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable) d Other rental real estate credits (see instructions) Type e Other rental credits (see instructions) Type E f Other credits (see instructions) Type 16a Name of country or U.S. possession b Gross income from all sources.... Gross income sourced at partner level. Foreign gross income sourced at partnership level d Reserved for future use e Foreign branch category f Passive category ---- g General category -- h Other (attach statement) Deductions allocated and apportioned at partner level Interest expense j Other 15f 16b 16C 16e 16h Foreign Transactions 16j 161 Deductions allocated and apportioned at partnership level to foreign source income k Reserved for future use Foreign branch category m Passive category ---- n General category ---- o Other (attach statement) p Total foreign taxes (check one): Paide Accrued .. q Reduction in taxes available for credit (attach statement) 160 16p 169 17a 17b 17c Alternative Minimum Tax (AMT) Items 17d r Other foreign tax information (attach statement) 17a Post-1986 depreciation adjustment. b Adjusted gain or loss........ c Depletion (other than oil and gas) d Oil, gas, and geothermal properties - gross income e Oil, gas, and geothermal properties - deductions f Other AMT items (attach statement) 18a Tax-exempt interest income... b Other tax-exempt income c Nondeductible expenses. 17e 17f 18a 18b 18c 19a 27,000 Other Information 19b 19a Distributions of cash and marketable securities b Distributions of other property 20a Investment income..... b Investment expenses. c Other items and amounts (attach statement) 20a 20b Form 1065 (2020) Feedback Check My Work Correct c. What information will be shown on Kayla's and Lisa's Schedules K-1, Part III? 9,000 3,000 Kayla's and Lisa's Schedules K-1 will each show a $ share of partnership income (line 1), and a s share of the partnership's long-term capital gain (line 9a), and s 9,000 of income from self-employment (line 14a). Kayla's K- 1 will show a $ 12,000 distribution and Lisa's K-1 will show a $ 15,000 distribution (both on line 19). What items will Kayla and Lisa report on their Federal income tax returns? Kayla and Lisa will each reports on their Schedule E and s on Schedule D. Feedback Check My Work Partially correct d. What is each partner's basis in her partnership interest at the end of the tax year? Kayla's basis: 20,000 Lisa's basis: $ 13,000 Consider the results if the partnership's revenues were $100,000 instead of $150,000. If required, use the minus sign to indicate an ordinary business loss. If an answer is zero, enter "0". e. Consider the results if the partnership's revenues were $100,000 instead of $150,000. How much is the partnership's ordinary business income (loss) on page 1? -32,000 What amount is shown on lines 1, 9a and 20 on Schedule K? Line 1: $ -32,000 Line 9a: $ Line 19a: $0 Use the ordering rules of Exhibit 21.2 (and the loss limitation rules), and calculate Kayla's basis in her partnership interest at the end of the year. Basis before loss allocation: S Ordinary loss allowed under $ 704(d): Ending basis in interest: $ Based on this calculation, what does Kayla report on her tax return? She reports a of $ and Use the ordering rules of Exhibit 21.2 (and the loss limitation rules), and calculate Lisa's basis in her partnership interest at the end of the year Basis before loss allocation: $ Ordinary loss allowed under $ 704(d): $ Ending basis in interest: Based on this calculation, what does Lisa report on her tax return? She reports a of $ and of s Feedback Check My Work The measurement and reporting of partnership income require a two-step approach. Certain items must be netted at the partnership level, and other items must be segregated and reported separately on the partnership return and each partner's Schedule K-1. The KL Partnership is owned equally by Kayla and Lisa. At the beginning of the year, Kayla's tax basis in her KL interest is $20,000 and Lisa's tax basis is $15,000. Partnership debt did not change from the beginning to the end of the tax year. KL reported the following income and expenses for the current tax year. Assume total assets are $680,400. Sales revenue Cost of sales $150,000 80,000 15,000 Distribution to Lisa Depreciation expense Utilities 20,000 14,000 Rent expense 18,000 6,000 Long-term capital gain Payment to Mercy Hospital for Kayla's medical expenses 12,000 a. Complete whether the following items are reported on Form 1065, page 1 or on Form 1065, Page 4, Schedule K. Sales revenue Form 1065, page 1 Cost of sales Form 1065, page 1 Distribution to Lisa Form 1065, Page 4, Schedule K Depreciation expense Utilities Form 1065, page 1 Form 1065, page 1 Form 1065, page 1 Rent expense Long-term capital gain Form 1065, Page 4, Schedule K Payment to Mercy Hospital for Kayla's medical expenses Form 1065, Page 4, Schedule K How much is the partnership's ordinary income on page 1? 18,000 $ What amount is shown on lines 1, 9a and 19(a) on Schedule K? Line 1: $ 18,000 Line 9a: $ 6,000 Line 19(a): $ 27,000 OMB No. 1545-0123 2019 Form 1065 Department of the U.S. Return of Partnership Income Treasury Internal For calendar year 2019, or tax year beginning ----, 2019, ending ----,20 Revenue Service Go to www.irs.gov/Form 1065 for instructions and the latest information. A Principal business Name of partnership activity KL Partnership B Principal product or Number, street, and room or suite no. If a P.O. box, see the service Type or instructions. Print D Employer identification number E Date business started return C Business code number City or town, state or province, country, and ZIP or foreign postal code F Total assets (see the instructions) $ 680,400 G Check applicable boxes: (1) Initial (2) Final (3) Name change (4) Address (5) Amended return return change HCheck accounting method: (1) Cash (2) Accrual (3) Other (specify) I Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year 2 I Check if Schedules C and M-3 are attached.. Caution: Include only trade or business income and expenses on lines la through 22 below. See the instructions for more information. Gross receipts or sales la 1a 150,000 b Returns and allowances. 1b c Balance. Subtract line 1b from line 1a. 1c 150,000 2 Cost of goods sold (attach Form 1125-A) 2 80,000 3 Gross profit. Subtract line 2 from line 1c. 3 70,000 Income 4 5 6 7 4 Ordinary income (loss) from other partnerships, estates, and trusts (attach statement) 5 Net farm profit (loss) (attach Schedule F (Form 1040 or 1040-SR)) 6 Net gain (loss) from Form 4797, Part II, line 17 (attach Form 4797) 7 Other income (loss) (attach statement) 8 Total income (loss). Combine lines 3 through 7 9 Salaries and wages (other than to partners) (less employment credits) 10 Guaranteed payments to partners ... 11 Repairs and maintenance 12 Bad debts 8 70,000 9 10 11 12 13 Rent .. 13 18,000 14 14 Taxes and licenses... 15 fo the instructions for imitations) Interest (see instructions) 15 15 16a Depreciation (if required, attach Form 4562) 16a 20,000 16b 16c 20,000 Deductions 17 b Less depreciation reported on Form 1125-A and elsewhere on return 17 Depletion (Do not deduct oil and gas depletion.) 18 Retirement plans, etc ....... Employee benefit programs 18 19 19 20 Other deductions (attach statement) 20 14,000 21 23 24 Tax and Payments 25 26 28 29 21 Total deductions. Add the amounts shown in the far right column for lines 9 through 20....... 52,000 22 Ordinary business income (loss). Subtract line 21 from line 8. 22 18,000 23 Interest due under the look back method-completed long-term contracts (attach Form 8697) 24 Interest due under the look back methodincome forecast method (attach Form 8866) 25 BBA AAR imputed underpayment (see instructions) 26 Other taxes (see instructions)...... 27 Total balance due. Add lines 23 through 26 27 28 Payment (see instructions) 29 Amount owed. If line 28 is smaller than line 27, enter amount owed 30 Overpayment. If line 28 is larger than line 27, enter overpayment... 30 Sign Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and Here to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than partner or limited liability company member) is based on all information of which preparer has any knowledge. May the IRS discuss this return with the preparer shown below? See instructions. Yes No Signature of partner or limited liability company member Date Print/Type preparer's name Paid Preparer's signature Date Check if self- PTIN employed Preparer Firm's name Firm's EIN Use Only Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11390Z Form 1065 (2019) Page 4 Total amount 1 18,000 Form 1065 (2019) KL Partnership Schedule K Partners' Distributive Share Items 1 Ordinary business income (loss) (page 1, line 22) 2 Net rental real estate income (loss) (attach Form 8825) 3a Other gross rental income (loss).. b Expenses from other rental activities (attach statement). 2 3a 3b c Other net rental income (loss). Subtract line 3b from line 3a 3c 0 4 Guaranteed payments! 4 a Services 4a b Capital 4b Es) c Total. Add lines 4a and 4b 4c 5 5 Interest income...... Income (Loss 6c | 7 8 9a 6,000 6 Dividends and dividend equivalents: a Ordinary dividends b Qualified dividends 6b c Dividend equivalents 7 Royalties ........ 8 Net short-term capital gain (loss) (attach Schedule D (Form 1065)) 9a Net long-term capital gain (loss) (attach Schedule D (Form 1065)) b Collectibles (28%) gain (loss). c Unrecaptured section 1250 gain (attach statement) 10 Net section 1231 gain (loss) (attach Form 4797) 11 Other income (loss) (see instructions) Type E 12 Section 179 deduction (attach Form 4562) 13a Contributions ........ 9b 9c 10 11 12 13a Deductions b Investment interest expense. 13b c Section 59(e)(2) expenditures: (1) Type (2) Amount 13c(2) 13d 14a 18,000 Self- Employ ment 14b 14c 15a 15b 15c Credits 15d 15e d Other deductions (see instructions) Type - 14a Net earnings (loss) from self-employment. b Gross farming or fishing income.. Gross nonfarm income....... 15a Low-income housing credit (section 42G)(5)) b Low-income housing credit (other). Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable) d Other rental real estate credits (see instructions) Type e Other rental credits (see instructions) Type E f Other credits (see instructions) Type 16a Name of country or U.S. possession b Gross income from all sources.... Gross income sourced at partner level. Foreign gross income sourced at partnership level d Reserved for future use e Foreign branch category f Passive category ---- g General category -- h Other (attach statement) Deductions allocated and apportioned at partner level Interest expense j Other 15f 16b 16C 16e 16h Foreign Transactions 16j 161 Deductions allocated and apportioned at partnership level to foreign source income k Reserved for future use Foreign branch category m Passive category ---- n General category ---- o Other (attach statement) p Total foreign taxes (check one): Paide Accrued .. q Reduction in taxes available for credit (attach statement) 160 16p 169 17a 17b 17c Alternative Minimum Tax (AMT) Items 17d r Other foreign tax information (attach statement) 17a Post-1986 depreciation adjustment. b Adjusted gain or loss........ c Depletion (other than oil and gas) d Oil, gas, and geothermal properties - gross income e Oil, gas, and geothermal properties - deductions f Other AMT items (attach statement) 18a Tax-exempt interest income... b Other tax-exempt income c Nondeductible expenses. 17e 17f 18a 18b 18c 19a 27,000 Other Information 19b 19a Distributions of cash and marketable securities b Distributions of other property 20a Investment income..... b Investment expenses. c Other items and amounts (attach statement) 20a 20b Form 1065 (2020) Feedback Check My Work Correct c. What information will be shown on Kayla's and Lisa's Schedules K-1, Part III? 9,000 3,000 Kayla's and Lisa's Schedules K-1 will each show a $ share of partnership income (line 1), and a s share of the partnership's long-term capital gain (line 9a), and s 9,000 of income from self-employment (line 14a). Kayla's K- 1 will show a $ 12,000 distribution and Lisa's K-1 will show a $ 15,000 distribution (both on line 19). What items will Kayla and Lisa report on their Federal income tax returns? Kayla and Lisa will each reports on their Schedule E and s on Schedule D. Feedback Check My Work Partially correct d. What is each partner's basis in her partnership interest at the end of the tax year? Kayla's basis: 20,000 Lisa's basis: $ 13,000 Consider the results if the partnership's revenues were $100,000 instead of $150,000. If required, use the minus sign to indicate an ordinary business loss. If an answer is zero, enter "0". e. Consider the results if the partnership's revenues were $100,000 instead of $150,000. How much is the partnership's ordinary business income (loss) on page 1? -32,000 What amount is shown on lines 1, 9a and 20 on Schedule K? Line 1: $ -32,000 Line 9a: $ Line 19a: $0 Use the ordering rules of Exhibit 21.2 (and the loss limitation rules), and calculate Kayla's basis in her partnership interest at the end of the year. Basis before loss allocation: S Ordinary loss allowed under $ 704(d): Ending basis in interest: $ Based on this calculation, what does Kayla report on her tax return? She reports a of $ and Use the ordering rules of Exhibit 21.2 (and the loss limitation rules), and calculate Lisa's basis in her partnership interest at the end of the year Basis before loss allocation: $ Ordinary loss allowed under $ 704(d): $ Ending basis in interest: Based on this calculation, what does Lisa report on her tax return? She reports a of $ and of s Feedback Check My Work The measurement and reporting of partnership income require a two-step approach. Certain items must be netted at the partnership level, and other items must be segregated and reported separately on the partnership return and each partner's Schedule K-1