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01/06/2015
20
13
TAX YEAR
EVALUATING the
Self-Employed Borrower
and other sources of income
Legal Disclaimer
The information presented in these training materials is for general information
only, and is based on guidelines and practices generally accepted within the
mortgage finance industry and is not intended to be all-inclusive. MGIC makes no
representations or warranties of any kind with respect to the accuracy,
completeness or suitability for any purpose of the information contained in this
training.
MGIC expressly disclaims any and all warranties, express or implied, including
without limitation warranties of merchantability and fitness for a particular
purpose regarding these materials and our training program. In no event will
MGIC be liable for any direct, indirect, incidental, punitive or consequential
damages of any kind with respect the training or materials provided.
All examples are hypothetical and are for illustrative purposes only. Our training
is not intended and should not be interpreted or relied upon as legal advice. We
encourage you to seek advice from a qualified professional.
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Objectives and Materials
► Discuss
& apply concepts of income analysis using
cash-flow form & case study:
◀
Discuss significance of tax returns to lending community and
how to identify income sources
◀
D fi b
Define
business
i
structures
t t
◀
Review personal 1040s – Schedules A-E, Form 2106, Schedule
K-1 for Partnership, S Corporation
◀
Analyze business returns - Partnership, S Corporation and
Corporation
◀
Complete AGI cash-flow method using Buyer case study
◀
Review materials: case study, SEB manual, cash-flow forms
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1
01/06/2015
Recent Industry Announcement
► Effective
► New
for applications dated on/after 4/1/2015
forms and a new approach for calculating:
◀
Income from Partnerships, S-Corporations and Corporations
◀
Rental Income
4
Recent Industry Announcement
►Qualifying business income:
•Partnership & S-Corporation K-1 income
History of income distribution required
•Corporate income
Sole ownership
5
Recent Industry Announcement
►Rental Income:
•Schedule E – rental income analysis retired from 1084
- Only royalty income analyzed using Schedule E
•Rental
Rental Income anal
analysis
sis performed using
sing FNMA
FNMA:
Form 1037 – Principal Residence, 2-4 unit property
Form 1038 – Investment Property
6
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01/06/2015
Tax Returns – Why Are They Needed?
► Federal
Tax Forms:
◀
Provide a snap shot in time of borrower’s taxable income for a
particular year
◀
Show a historical pattern of income
► Loan
◀
Reviewers:
Determine if income used for qualifying:
– Is stable, predictable and likely to continue
(recurring & steady stream of income)
– Exists today
– Supports cash flow vs. taxable income
For more information on forms and schedules visit www.IRS.gov
7
Taxable Income vs. Cash Flow
► Taxable
Income
◀
Amount reported to IRS
◀
Page 1 of 1040 - personal return (pg.4 of case study)
► Cash-Flow
◀
Income
Amount of money available each month to make payments
– W-2 (pg.2 & 3 of case study)
– Tax schedules (Start with pg.4 of case study)
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Noncash Expense
► Expenses
deducted from cash flow that do not
require an actual cash payment
► Can
be added back to cash flow when included in
total expenses
◀
3 types of ‘Noncash’ expenses
– Depreciation
– Depletion
– Amortization
► Form
2106, Schedule C, E, F & business returns
9
3
01/06/2015
Business Structures
► Sole
Proprietorship - Schedule C
► Partnership
- 1065 Tax Returns
◀
General - 1065 K-1
◀
Limited - 1065 K-1
◀
Limited Liability Company - 1065 K-1
► Corporation
◀
S Corporation - 1120S Tax Returns & 1120S K-1 and/or W-2
◀
Corporation - 1120 Tax Returns & W-2
► Note: In some instances an LLC may be filed with Schedule C
10
IRS Limited Losses/Expenses
Limit of loss or expense the taxpayer can deduct from
income
► Passive activity limitations
► Meal
and entertainment exclusion
11
Recurring
Income & Expense
►
Income:
◀
►
►
Expected to continue 3 or
more years
Expense:
◀
Nonrecurring
Income & Expense
Day-to-day cost of business
operations
Income:
◀
►
One-time occurrence (i.e.,
sale of an asset, prize)
Expense:
◀
Extraordinary one-time
occurrence (i.e., casualty
loss)
12
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01/06/2015
Cash-Flow Analysis –
AGI Method
Adjusted Gross Income
Personal Returns, page 1
Alternative Method:
Schedule Analysis
Method (SAM)
13
Cash-Flow Analysis –
AGI Method
Adjusted Gross Income
Business Returns, page 2
14
Section I, Form 1040 – Page 1
Effect on Cash-Flow Analysis
15
5
01/06/2015
Bob and Sue Buyer – 1003 Summary
► Jointly
–
◀
Married with no dependents
◀
Own two rental properties
► Bob
–
◀
S l proprietor
Sole
i t off Up
U &R
Running
i computer
t service
i
◀
Partner in Tanglewood Realty
◀
50% owner of Creative Network Design Services, an S Corporation;
he does not take an active part in management
► Sue
–
◀
Owner and manager of Interior Innovations Incorporated, a regular
corporation
◀
Part-time sales rep for Creative Greeting Cards
16
Case Study pg. 4
Form 1040
17
Case Study pg. 4 Manual pg. 1-3
Form 1040
18
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01/06/2015
Case Study pg. 2 Manual pg. 1-3
Form W-2
19
Case Study pg. 3 Manual pg. 1-3
Form W-2
20
Section I, Form 1040 – Page 1
Effect on Cash-Flow Analysis
21
7
01/06/2015
Case Study pg. 4 Manual pg. 1-3
Form 1040
Savings/CD’s
Stocks/mutual funds
Divorce decree/12 months’ checks
i
i.e.,
Seasonal
S
l work?
k?
i.e., Consulting/contract
22
Case Study pg. 5 Manual pg. 1-11
Form 1040, page 2
4506-T to validate income via the IRS
23
Section I, Form 1040 – Page 1
Effect on Cash-Flow Analysis
24
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01/06/2015
Case Study pg. 6 Manual pg. 1-17
Schedule A
25
Case Study pg. 7 Manual pg. 1-19
Form 2106
26
Case Study pg. 8 Manual pg. 1-21
Form 2106, page 2
Business
miles (Line 13)
x Mileage rate
a
Actual
depreciation
expense
a
27
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01/06/2015
Section II, Form 2106
Effect on Cash-Flow Analysis
28
Section III, Schedule B
Effect on Cash-Flow Analysis
29
Case Study pg. 4 Manual pg. 1-13 & 1-23
Form 1040
Case Study pg. 40
Compare 2012 to 2013
30
10
01/06/2015
Section III, Schedule B
Effect on Cash-Flow Analysis
31
Case Study pg. 9 Manual pg. 1-25
Schedule C
32
Case Study pg. 9 Manual pg. 1-25 & 1-27
Schedule C
33
11
01/06/2015
Case Study pg. 10 Manual pg. 1-29
Schedule C,
page 2
Business miles x
Depreciation Factor
a
Amortization or Casualty Loss
34
Section IV, Schedule C
Effect on Cash-Flow Analysis
35
Case Study pg. 11 Manual pg. 1-33
Schedule D
2-year history
needed
to use income or
loss
Follow your
Guidelines
Follow your
Guidelines
Case Study pg. 40
Compare 2012 to 2013
36
12
01/06/2015
Case Study pg. 13 Manual pg. 1-39
Form 8949
37
Section V, Schedule D
Effect on Cash-Flow Analysis
38
Case Study pg. 14 Manual pg. 1-43
Schedule E
Traditional
Method
39
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01/06/2015
Section VII, Schedule E
Effect on Cash-Flow Analysis
40
Case Study pg. 14 Manual pg. 1-43
Schedule E – PITIA Method
PITIA Method
Line 21
-3,200
Line 19
+0
Line 18
+2,500
Line 16
+1,000
Line 13
+0
Line 12
+4,000
Line 9
+250
Total
=4,550
÷ 12
=379.17
PITIA
-600
REO 1003
=(220.83)
41
Case Study pg. 15 Manual pg. 1-45
Schedule E – page 2
Request K-1 from Borrower
And /or Business Returns based on % of
ownership
Form 8582
is not income;
Manual p. 1-47
Form 4562
is not income;
Manual p. 1-31
42
14
01/06/2015
Flow of Partnership/S Corporation
Income or Loss
1065
Partnership Return
Partnership
S
Corporation
Line 22
__________
Income / Loss
1120S
S Corporation
Return
Line 21
__________
1065
Schedule K-1
Ownership % Lines
1 _________
2 _________
3 _________
1120S
Schedule K-1
Ownership % Lines
1040
Schedule E
Part II
1040
Line 17
___
1 _________
2 _________
3 _________
43
Case Study pg. 17 Manual pg. 2-5
Schedule K-1 (Form 1065)
44
Manual pg. 2-7
Form 8825
45
15
01/06/2015
Case Study pg. 17 Manual pg. 2-3
Schedule K-1 (Form 1065)
46
Case Study pg. 17 Manual pg. 2-5
Schedule K-1 (Form 1065)
X
47
Section IX, Partnership Schedule K-1 (Form 1065)
Effect on Cash-Flow Analysis
48
16
01/06/2015
Case Study pg. 20 Manual pg. 2-9
Form 1065
49
Case Study pg. 19 Manual pg. 2-17
Schedule K-1
(Form 1120S)
Shareholder’s
percentage of
stock ownership
for tax year – 50%
50
Section X, Schedule K-1 (Form 1120S)
Effect on Cash-Flow Analysis
51
17
01/06/2015
Case Study pg. 26 Manual pg. 2-21
Form 1120S
52
Answer Key
Personal Income
Analyze & Compare
◀ Is it consistent?
◀ Will it be ongoing?
53
Summary
► Identified
common income sources
► Discussed
► Defined
taxable income vs. cash flow
key business structures
► Analyzed
A l
d
self-employed
lf
l
db
borrower(s)
( )
► Completed
cash-flow analysis
54
18
01/06/2015
www.mgic.com/seb2013
www.mgic.com
55
Cash-Flow Software
► Editable
PDF
► Nothing
to download
► Line-by-line
► Save
S
help links to resource manual
and
d print
i t with
ith ease
► Updated
► Please
annually
share it with others!!
56
Cash-Flow Software
Need help? Line-by-line instructions link to the manual.
Automatically
Calculates Totals
57
19
01/06/2015
20
13
TAX YEAR
Thank You
for choosing MGIC
www.mgic.com
20