The KL Partnership is owned equally by Kayla and Lisa. Kayla’s basis is $20,000 at the beginning of the tax year. Lisa’s basis is $16,000 at the beginning of the year. Assume 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:
Sales revenue ..................... $150,000
Cost of sales ...................... 80,000
Distribution to Lisa .................... 15,000
Depreciation expense................... 20,000
Utilities ........................ 14,000
Rent expense ...................... 18,000
Long-term capital gain .................. 6,000
Payment to Mercy Hospital for Kayla’s medical expenses ..... 12,000

a. Prepare a Microsoft Excel spreadsheet that could be used in a CPA firm to accumulate KL’s information that would be reported on Form 1065, page 1 [Ordinary business income (loss)] and page 4 (Schedule K). Include calculations and subtotals to ensure the spreadsheet will automatically update if the information changes. How much is the partnership’s ordinary income on page 1? What information is shown on Schedule K? 

b. Use the information in part (a) to prepare Form 1065, pages 1 and 4 (Schedule K) for the KL Partnership. On page 1, omit items A to J at the top if the facts do not provide that information. For Schedule K, line 14, assume both partners are active in the partnership. 

c. Add columns to your spreadsheet to allocate amounts to Kayla and Lisa. (For this requirement, disregard the income from self-employment and information related to the qualified business income deduction.) Show the partners’ allocation percentages at the top of their columns, and use those percentages in formulas to allocate any separately stated items that should be allocated. (Note that some items are directly assigned to a partner.) What information will be shown on Kayla’s and Lisa’s Schedules K–1, Part III? What items will Kayla and Lisa report on their Federal income tax returns? 

d. Expand your spreadsheet. Add rows for beginning basis and ending basis below Kayla’s and Lisa’s columns, and calculate each partner’s ending basis in the partnership interest. How do you make this calculation? What is each partner’s basis in her partnership interest at the end of the tax year? 

e. Consider the results if the partnership’s revenues were $100,000 instead of $150,000. What happens if you update the revenues line on your spreadsheet? Are your new amounts correct for the Form 1065/Schedule K information, Schedule K–1 information, and partners’ bases? Why or why not? What conclusions can you draw? 

Schedule K–1

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651118 O Amended K-1 Part III Partner's Share of Current Year Income, Deductions, Credits, and Other Items Final K-1 OMB No. 1545-0123 Schedule K-1 2018 (Form 1065) Department of the Treasury Internal Revenue Service 1 Ordinary business income (loss) 15 Credits For calendar year 2018, or tax year I 2018 ending 90,000 Net rental real estate income (loss) 2 beginning Partner's Share of Income, Deductions, Credits, etc. 120,000 Other net rental income (loss) 3 16 Foreign transactions See back of form and separate instructions. Part I Information About the Partnership 4 Guaranteed payments A Partnership's employer identification number 120,000 11-111IIII 5 Interest income Partnership's name, address, city, state, and ZIP code 6a Ordinary dividends Beachside Properties LLC 1600 Ocean Vista Way Surfside 1,600 6b Qualified dividends 1,600 IRS Center where partnership filed retum 6c Dividend equivalents P.O. Box 409101, Ogden, UT 84409 D O Check if this is a publicly traded partnership (PTP) 7 Royalties Part II Information About the Partner Net short-term capital gain (loss) 8. 17 Alternative minimum tax (AMT) items 7,290 4,800 Net long-term capital gain (loss) E Partner's identifying number 111-11-111I 9a F Partner's name, address, city, state, and ZIP code 9b Collectibles (28%) gain (loss) Maria LeClere 1600 Ocean Vista Way Unrecaptured section 1250 gain Tax-exempt income and nondeductible expenses 18 Surfside