calculating income from 1040, k1 & 1120s (s corporation) s...• review the business returns •...
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Genworth Mortgage Insurance Corporation ©2017 Genworth Financial, Inc. All rights reserved.
Calculating Income from 1040, K1 & 1120S
(S Corporation)
Tax Return Review Series
December 2017
Objective
”Understand the meaning of “Self Employed
Learn to use Fannie Mae’s Form 1084 to calculate supportableincome using tax returns. We will also include a brief overview of Freddie Mac Guidelines
Complete Fannie Mae’s 1084
–W2 from 1120S (Section 1)
– 1120S K1 Review (Section 9)
– 1120S Review (Section 10)
Complete the Solvency Calculator
– Solvency/Liquidity Test
Tax return Series Form 1120 with K1
SEL 2015-09– Cash Flow Analysis Form updated
– Sections of Chapter B3-3-2 for Self-
Employed Borrowers updated
• Evidence of liquidity if no distributions made
from partnerships or S corps
– DU updated to allow one year personal
and business tax returns for certain case
files
– Changes effective for applications dated
February 1, 2016
Fannie Mae Updates
Tax return Series Form 1120 with K1
2016 Fannie Mae Updates
SEL 2016-05– Updates to Business Income
• Eliminate requirement to confirm
borrower has access to income
• Guidance for methods lenders may use
to determine adequate business liquidity
when liquidity assessment is required
• Verbal verifications of employment for a
self-employed borrower can be obtained
within 120 days prior to note date
– Chapter B3-3-1.07, 09 and B3-3-2 of
the Selling Guide have been updated
– Effective on or before October 1, 2016
but lenders and implement
immediately
Tax return Series Form 1120 with K1
S Corporation Income
Tax return Series Form 1120 with K1
Not Using Self Employed Income
Tax return Series Form 1120 with K1
Tax return Series Form 1120 with K1
When Do We Have To Tell Loan Product Advisor Our Borrower Is Self-
Employed?
Not Using Self Employed Income
Freddie Mac Updates
Tax return Series Form 1120 with K1
Tax return Series Form 1120 with K1
Training Tools and Information
Training Tools and Information
Tax return Series Form 1120 with K1 10
You’ll Need Calculators-
Tax return Series Form 1120 with K1
Tax return Series Form 1120 with K1
You’ll Need-
Tax return Series Form 1120 with K1
The Case Study…The Case Study Alice Firstimer
Alice is a 50% shareholder of an 1120S.
Her reported taxable Income is several sources
as evidenced by her 1040.
Our session today will focus only on her 1120S
Income from Smith and Firstimer
Other sources may be used to qualify, but our
session will focus for training purposes on this
one business- An S Corporation
Page 2
Tax return Series Form 1120 with K1
1120S Corporation
Line 21 Ordinary Income
$_________
K1
%
Line 1 Ordinary Income
$_________
Schedule E
Part II
Net Income $_______
1040
Line 17 Net Income Sch.E
*$_________
*Taxed at a personal rate
H
14
Form 1120S / S-Corp Return
Tax return Series Form 1120 with K1
Page 14
Tax return Series Form 1120 with K1
1120S Corporation
Line 21 Ordinary Income
$_________
K1
%
Line 1 Ordinary Income
$_________
Schedule E
Part II
Net Income $_______
1040
Line 17 Net Income Sch.E
*$_________
*Taxed at a personal rate
H
16
Review the K1
Tax return Series Form 1120 with K1
Page 12
Tax return Series Form 1120 with K1
1120S Corporation
Line 21 Ordinary Income
$_________
K1
%
Line 1 Ordinary Income
$_________
Schedule E
Part II
Net Income $_______
1040
Line 17 Net Income Sch.E
*$_________
*Taxed at a personal rate
H
18
Review Schedule E
Tax return Series Form 1120 with K1
Page 8
Tax return Series Form 1120 with K1
1120S Corporation
Line 21 Ordinary Income
$_________
K1
%
Line 1 Ordinary Income
$_________
Schedule E
Part II
Net Income $_______
1040
Line 17 Net Income Sch.E
*$_________
*Taxed at a personal rate
H
20
Form 1040
Reports to Line 17
Tax return Series Form 1120 with K1
Page 2
Let’s Begin!
We will use the 1040 to identify the
if any wages were reported (line
7).Then we will review the
corresponding W2 forms.
Tax return Series Form 1120 with K1
Get Out Your Cash Flow Calculator and Case Study And Let’s Begin
Page 2
Fannie Mae Cash Flow Form 1084
Are any W2 wages from self-employment?
If yes, determine if the borrower owns 25% or more of the entity that
issued the W2!
Tax return Series Form 1120 with K1
Page 1
Fannie Mae Cash Flow Form 1084
Tax return Series Form 1120 with K1
.Verify ownership with the K-1
This is the only document that
will verify percent of ownership
in an S Corporation.
Alice owns 50% of the business
So is our W-2 Wage going to be
considered Self-employed or
salary in this case?
Page 12
Fannie Mae Cash Flow Form 1084
25% or greater ownership indicates that the borrower has to be treated
as “Self Employed”. When self employed and using the income you
must:
• Review the Business Returns
• A business Credit Report and P&L may be required (check investor guidelines)
• If two years tax returns required, average the Income (only if not declining).
• Y-T-D Paystub is required but is not used in the calculation of qualifying
income.
Tax return Series Form 1120 with K1
Page 1
Income Analysis Form 1084 Section 9
Tax return Series Form 1120 with K1
Let’s Use the Solvency Calculator-
Tax return Series Form 1120 with K1
1120S Review for Solvency/Liquidity
The last page of the 1120S Return is a Balance Sheet (Schedule L)
Tax return Series Form 1120 with K1
Page 17
Balance Sheet
Tax return Series Form 1120 with K1
Current Ratio and Quick Ratio
Current Assets (Cash #1 + Acct Receivable #2 + # 4 + #5+ Current Assets #6
Current Liabilities (Acct Pay. #16 + MNB #17 + Other Current Liabilities #18
Current Assets $2,760 + $0 + $0 + $0 +$0= $2,760
Current Liabilities $0 + $0 + $4,789 = $4,789 .60 - SolvencyPage 17
Did The Business Pass The Liquidity Test?
Tax return Series Form 1120 with K1
Income Analysis Form 1084 Section 9
Tax return Series Form 1120 with K1
Page 12
Income Analysis Form 1084 Section 9
Tax return Series Form 1120 with K1
Page 12
Income Analysis Form 1084 Section 9
Tax return Series Form 1120 with K1
Page 12
Income Analysis Form 1084 Section 10
Tax return Series Form 1120 with K1
Now you need to review the 1120S…
Page 14
Income Analysis Form 1084 Section 10
Tax return Series Form 1120 with K1
Page 14
Income Analysis Form 1084 Section 10
Tax return Series Form 1120 with K1
Page 14
Income Analysis Form 1084 Section 10
Tax return Series Form 1120 with K1
Page 14
Income Analysis Form 1084 Section 10
Tax return Series Form 1120 with K1
Page 14
Income Analysis Form 1084 Section 10
Tax return Series Form 1120 with K1
Page 19
Income Analysis Form 1084 Section 10
Tax return Series Form 1120 with K1
Page 17
Income Analysis Form 1084 Section 10
Tax return Series Form 1120 with K1
Page 18
Income Analysis Form 1084 Section 10
Tax return Series Form 1120 with K1
Could we use the full income of $110757 if needed in this case?
Genworth Underwriting Guidelines
Tax return Series Form 1120 with K1
Genworth Rate Express®
Tax return Series Form 1120 with K1
LOS Connections
Tax return Series Form 1120 with K1
Tax return Series Form 1120 with K1
Training Tools and Information
Training Tools and Information
Tax return Series Form 1120 with K1 47
Tax return Series Form 1120 with K1
Additional MI Site Information
Tax return Series Form 1120 with K1
ActionCenter®: 800 444.5664
Your Local Genworth
Regional Underwriter
Your Genworth Sales
Representative
Your Genworth Resources
Tax return Series Form 1120 with K1
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accuracy, we also know that any discussion of laws and their application to particular facts is subject to
individual interpretation, change, and other uncertainties. Our training is not intended as legal advice, and is
not a substitute for advice of counsel. You should always check with your own legal advisors for
interpretations of legal and compliance principles applicable to your business.
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