Form 1065 Example This filled-in Form 1065 is for the AbleBaker Book Store, apartnership composed of Frank Able and Susan Baker. The partnershipuses an accrual method of accounting and a calendar year for reportingincome and loss. Frank works full time in the business, while Susanworks approximately 25% of her time in it. Both partners are generalpartners. The partnership agreement states that Frank will receive a yearlyguaranteed payment of $20,000 and Susan will receive $5,000. Anyprofit or loss will be shared equally by the partners. The partnersare personally liable for all partnership liabilities. Both partnersmaterially participate in the operation of the business. In addition to income and expenses from partnership operations,AbleBaker made a $650 cash charitable contribution, received $150 fromdividends, and received $50 tax-exempt interest from municipal bonds. Frank completes the partnership's Form 1065 as explained next. Page 1 The IRS sent Frank a postcard with his preaddressed label, askingif he needed a Form 1065 package. He returned the postcard and the IRSsent him the package. When Frank completes the return, he places thelabel in the address area on page 1. Frank supplies all the information requested at the top of thepage. Income The partnership's ordinary income from the trade or businessactivity is shown on lines 1a through 8. Line 1.Gross sales of $409,465 are entered on line 1a. Returns andallowances of $3,365 are entered on line 1b, resulting in net sales of$406,100, entered on line 1c. Line 2.Cost of goods sold, $267,641, from Schedule A, line 8, is enteredhere. Line 3.Gross profit of $138,459 is shown on this line. Line 7.Interest income on accounts receivable, $559, is entered on thisline. The schedule that must be attached for this line is not shown. Line 8.Total income, $139,018 (lines 3 through 7), is shown here. Deductions The partnership's allowable deductions are shown on lines 9 through21. Line 9.All salaries and wages are included here except guaranteed paymentsto partners (shown on line 10). Frank enters the $29,350 wages paid tothe partnership's employees. The partnership had no employment creditsto reduce that amount. Line 10.Guaranteed payments of $25,000 to partners Frank ($20,000) andSusan ($5,000) are entered here. Line 11.Repairs of $1,125 made to partnership equipment are entered on thisline. Line 12.During the year, $250 owed to the partnership was determined to bea wholly worthless business bad debt. The $250 is shown on this line.(If this had been a nonbusiness bad debt, it would have been reportedin Part I of Schedule D (Form 1065) and included separately onSchedules K and K-1, line 7, as a stated short-term capitalloss.) Line 13.Rent paid for the business premises, $20,000, is listed on thisline. Line 14.Deductible taxes of $3,295 are entered on this line. Line 15.Interest paid to suppliers during the year totaled $1,451. This isbusiness interest, so it is entered here. Lines 16a and 16c.Depreciation of $1,174 claimed on assets used in the partnership'sbusiness is entered on these lines. (Line 16b is left blank becausethere is no depreciation listed elsewhere on the return.) Frank doesnot need to attach Form 4562 because the partnership did not placeproperty in service during 1999 or depreciate a car or other listedproperty. Line 20.Other allowable deductions of $8,003 not listed elsewhere on thereturn and for which a separate line is not provided on page 1 areincluded on this line. Frank attaches a schedule that lists eachdeduction and the amount included on line 20. This schedule is notshown. Line 21.The total of all deductions, $89,648 (lines 9 through 20), isentered on this line. Line 22.The amount on line 21 is subtracted from the amount on line 8. Theresult, $49,370, is entered here and on line 1 of Schedule K. Theamount allocated to each partner is listed on line 1 of ScheduleK-1. Signatures Frank signs the return as a general partner. The AbleBaker BookStore did not have a paid preparer. Page 2Schedule A Schedule A shows the computation of cost of goods sold. Beginninginventory, $18,125, is entered on line 1 and net purchases, $268,741,are entered on line 2. The total, $286,866, is entered on line 6.Ending inventory, $19,225 (entered on line 7), is subtracted from line6 to arrive at cost of goods sold, $267,641 (entered on line 8 and onpage 1, line 2). Frank answers all applicable questions for item 9. Schedule B Schedule B contains 11 questions about the partnership. Frankanswers question 1 by marking the "General partnership" box. Heanswers questions 2 through 11 by marking the "No" boxes. Question 5 asks if the partnership meets all the requirementslisted in items 5a, b, and c. Because the partnership's total receiptswere not less than $250,000, all three of these requirements are notmet. Frank must complete Schedules L, M-1, M-2, and item Fon page 1 of Form 1065 and item J on Schedule K-1. Pages 3 - 4Schedule K On Schedule K, Frank lists the total of both partners' shares ofincome, deductions, credits, etc. Each partner's distributive share ofincome, deductions, credits, etc., is reported on Schedule K-1.The line items for Schedule K are discussed in combination with theSchedule K-1 line items, later. Page 4--Analysis of Net Income (Loss) An analysis must be made of the distributive items on Schedule K.This analysis is based on the type of partner. Since the AbleBakerBook Store has two individual partners, both of whom are "active"general partners, the total on line 1, $73,870, is entered on line 2a,column ii. Page 4Schedules L, M-1, and M-2 Partnerships do not have to complete Schedules L, M-1, orM-2 if all of the tests listed under question 5 of Schedule Bare met and question 5 is marked "Yes." The AbleBaker Book Storedoes not meet all of the tests, so these schedules must be completed. Schedule L Schedule L contains the partnership's balance sheets at thebeginning and end of the tax year. All information shown on thebalance sheets for the AbleBaker Book Store should agree with itsbooks of record. The entry in column (d) of line 14 for total assets at the end ofthe year, $45,391, is carried to item F at the top of page 1 since theanswer to question 5 on Schedule B was "No." Schedule M-1 Schedule M-1 is the reconciliation of income per thepartnership books with income per Form 1065. Line 1.This line shows the net income per books of $48,920. This amount isfrom the profit and loss account (not shown in this example). Line 3.This line shows the guaranteed payments to partners. Line 5.This is the total of lines 1 through 4 of $73,920. Line 6.Shown here is the $50 tax-exempt interest income from municipalbonds recorded on the books but not included on Schedule K, lines 1through 7. This interest is reported on Schedule K, line 19. Line 9.This is line 5 less line 8, $73,870. This line is the same as line1 of the Analysis of Net Income (Loss) section of ScheduleK at the top of page 4. Schedule M-2 Schedule M-2 is an analysis of the partners' capitalaccounts. It shows the total equity of all partners at the beginningand end of the tax year and the adjustments that caused any increaseor decrease. The total of all the partners' capital accounts is thedifference between the partnership's assets and liabilities shown onSchedule L. A partner's capital account does not necessarily representthe tax basis for an interest in the partnership. Line 1.As of January 1, the total of the partners' capital accounts was$27,550 (Frank -- $14,050; Susan -- $13,500). This amountshould agree with the beginning balance shown on line 21 of Schedule Lfor the partners' capital accounts. Line 3.This is the net income per books. Line 5.This is the total of lines 1 through 4. Line 6.Each partner withdrew $26,440 (totaling $52,880) from thepartnership. These withdrawals are shown here and on Schedule K, line22. The partners' guaranteed payments, which were actually paid, arenot included because they were deducted when figuring the amount shownon line 3. Line 9.This shows the total equity of all partners as shown in the booksof record as of December 31. This amount should agree with theyear-end balance shown on line 21 of Schedule L for the partners'capital accounts. Item J on Schedule K-1 reflects each partner's share of theamounts shown on lines 1 through 9 of Schedule M-2. Schedule K-1 Schedule K-1 lists each partner's share of income,deductions, credits, etc. It also shows where to report the items onthe partner's individual income tax return. Illustrated is a copy ofthe Schedule K-1 for Frank W. Able. All information asked for atthe top of Schedule K-1 must be supplied for each partner. Allocation ofPartnership Items The partners' shares of income, deductions, etc., are shown next. Income (Loss) Line 1.This line on Schedule K-1 shows Frank's share ($24,685) ofthe income from the partnership shown on Form 1065, page 1, line 22.The total amount of income to both partners is shown on line 1,Schedule K. Line 4b.Dividends must be separately stated. They are not included in theincome (loss) of the partnership on Form 1065, page 1, line 22. Thisline on Schedule K-1 shows Frank's share, $75. This line onSchedule K shows the total dividends of $150. Line 5.This line on Schedule K-1 shows only the guaranteed paymentsto Frank of $20,000. This line on Schedule K shows the totalguaranteed payments to both partners of $25,000. Deductions Line 8.During the year, the partnership made a $650 cash contribution tothe American Lung Association. Each partner may be able to deduct hisor her share of the partnership's charitable contribution on his orher individual income tax return if the partner itemizes deductions.Frank's share of the contribution, $325, is entered on this line ofSchedule K-1. This line on Schedule K shows the totalcontribution. Investment Interest Line 14b.The partnership had no interest expense on investment debts, but ithad investment income (dividends) of $150 as shown on line 4b,Schedule K. That amount is also shown on this line of Schedule K, andthe partner's share is shown on this line of Schedule K-1. Self-Employment Line 15a.Net earnings (loss) from self-employment are figured using theworksheet in the Form 1065 instructions for Schedule K (not shown).Frank and Susan's net earnings from self-employment are the total ofthe partnership income shown on line 1 of Schedule K and theguaranteed payments shown on line 5. This total, $74,370, is enteredon Schedule K, and each individual partner's share is shown on his orher Schedule K-1. Each partner uses his or her share to figurehis or her self-employment tax on Schedule SE (Form 1040),Self-Employment Tax (not shown). Other Line 19.Frank enters the $50 municipal bond interest received by thepartnership on this line of Schedule K and $25 on this line of eachpartner's Schedule K-1. Line 22.Frank enters the $52,880 cash withdrawals made by the partnersduring the year on this line of Schedule K. He enters the amount eachpartner withdrew on this line of the partner's Schedule K-1. Form 1065 page 1 Form 1065 page 2 Form 1065 page 3 Form 1065 page 4 Schedule K-1 page 1 Schedule K-1 page 2