evaluating self-employed borrowers...evaluating self-employed borrowers. 03/11/2020 2 2 legal...
TRANSCRIPT
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Evaluating
Self-Employed Borrowers
TAX YEAR 2020
Corporations and Financial Statements
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2
Legal Disclaimer
The materials included in this presentation are intended for general information only. This
presentation is not intended to be complete or all-inclusive regarding the matters discussed herein,
and nothing contained in this presentation is intended, or should be relied upon, as legal,
accounting, compliance or other professional advice.
Although MGIC believes the information set forth in this publication is generally accurate, the
information may be outdated due to the rapidly changing nature of the residential mortgage
industry, and MGIC does not warrant the accuracy, reliability or completeness of any information
contained in this publication.
The information in this publication is culled from a variety of business and mortgage industry
sources. Attribution is given where deemed necessary. Opinions and insights expressed herein do
not necessarily represent the views of MGIC.
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3
Objectives
■ Convert tax entries into cash flow:
Corporation
• 1120 Corporation Form
• SEB W-2
■ Review components of financial statements
■ Trend Analysis using Comparative Income Analysis tool
■ Your questions
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4
Business Structures
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5
Business Structures
Sole Proprietorship
• Schedule C
• Note: In some instances, an LLC may be filed with Schedule C
Partnership
• Form 1065 e.g., General, Limited & Limited Liability Company
• K-1 (Form 1065), e.g., General, Limited & Limited Liability Company
Corporation
• S Corporation –Form 1120S
• K-1 (Form 1120S) and/or W-2
• Corporation –Form 1120 & W-2
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Documentation
Matrix
6
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Ownership Percentage
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Form 1125-E
8
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Corporation
Form 1120/SEB W-2
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Form 1120 - Corporation
■ Corporation
Legal entity
• separate and distinct from its owners
(shareholders)
Profit (and loss) reported on Form 1120
Taxed on its profits
Profits distributed to shareholders via dividends
Commonly, shareholders compensated via
Form W-2
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SAM Cash Flow Worksheet
11
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Now what?
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Meet Ginny Borrower
■ 50% partner in Westchester
Development, LLC
Partnership Schedule K-1
Form 1065
Form 8825
■ 100% owner of Interior
Innovations, Inc.
SEB W-2
Form 1120
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Form 1040
14
Case Study pg. 1; Manual
pg. 13
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Form W-2
15
Case Study pg. 19;
Manual pg. 13
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Form 1120
Case Study pg. 44;
Manual pg. 79
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Form 1120
Case Study pg. 44;
Manual pg. 79
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Form 1120 – page 1
Case Study pg. 44; Manual pg. 79
18
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Form 1120 -
page 1
19
Case Study pg. 44;
Manual pgs. 79-81
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Effect on
Cash Flow
Analysis
20
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Form 1120 –
Schedule L
page 6
21
Case Study pg. 49;
Manual pg. 85
• Line of credit
• Regular roll over
• Sufficient liquid assets
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Form 1120 - page 6
22
Case Study pg. 49;
Manual pg. 85
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Effect on
Cash Flow
Analysis
23
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Effect on
Cash Flow
Analysis
24
$66,470.00 $56,650.00/12 = $5,539 /12 = $4,721
/24 = $5,130
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Cash Flow
Analysis
Summary
25
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What about COVID-19 impact?
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Documentation
Matrix
27
• At minimum, gather
YTD income statement
and if unaudited, three
months of business
bank statements
Sole
Proprietorship
Partnership
(General,
Limited or LLC) S Corporation Corporation
Form 1040: U.S. Individual Income Tax
Return with all applicable schedules and
W-2s
Schedule C: Profit or Loss from Business
Schedule E, Part II: Income or Loss From
Partnerships or S Corporations
Schedule K-1 (Form 1065): Partner’s
Share of Income, Deductions, Credits, etc.
Form 1065: U.S. Return of Partnership
Income with all applicable schedules
Schedule K-1 (Form 1120S): Shareholder’s
Share of Income, Deductions, Credits, etc.
Form 1120S: U.S. Income Tax Return for
and S Corporation with all Applicable
schedules
Form 1120: U.S. Corporate Income Tax
Return with all applicable schedules
Year-to-Date Profit & Loss Statement/
Interim Balance Sheet: as applicable
Partnership Agreement: may be required
Corporate Resolution: may be required
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Financial Statements
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Commonly used financial statements
■ Income Statement
Specific period of time
• Annual
• Quarterly
• YTD
■ Balance Sheet
Specific date
• August 31, 2021
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Who prepares the financial statements?
■ Accountant
■ Tax Professional
■ Borrower
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Audited or not…what’s the big deal?
■ Unaudited statements
Majority of time
Self prepared or third-party prepared
Used for supporting documentation
■ Audited statements
Rarely received
Requires third-party verification of information by
examining records – costly and time consuming
May be used for qualifying
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When are financial statements typically needed?
■ Loan application is dated > 120 days after the end of
the business’s tax year
■ Tax returns are on extension
■ Significant income/loss difference between 2 years of
tax returns
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Financial Statements
Income Statement
Profitability and growth
Summary over time
Revenues
Costs/expenses
Net Profit
Balance Sheet
Financial wellbeing
Snapshot picture
Assets
Liabilities
Owners’ Equity
33
Assets = Liabilities + Owners’ EquityRevenue - Cost/Expenses = Net Profit
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Balance Sheet
34
Digital Network Systems
Balance sheet
June 30, 2021
Page 99
Assets = Liabilities + Owners’ Equity
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Balance Sheet –
Schedule L
Assets = Liabilities + Owners’ Equity
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Digital Network
Systems Income
Statement
36
Page 91
Revenue - Cost/Expenses = Net Profit
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Digital Network
Systems Income
Statement
37
• Revenue
• Sales
• Other income sources
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Digital Network
Systems Income
Statement
38
• Expenses
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Income Statement
39
Net Profit
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Income Statement –
1120-S
Revenue - Cost/Expenses = Net Profit
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Fannie Mae -
Guidance
41
Selling Guide – Published
04/07/2021
B3-3.2-01: Underwriting
Factors and Documentation
for a Self-Employed Borrower
(10/24/16)
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Freddie Mac -
Guidance
42
Selling Guide - Published
04/07/2021
5304.1(d): Stable monthly
income and documentation
requirements for self-
employed borrowers –
Business and income analysis
(01/15/21)
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43
Both are looking for
year-over-year trends,
but of different things…
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Comparative
Income
Analysis
44
Line items
entered in table
Auto calculate
in matrix:
• % Changes
• Comparisons
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Comparative
Income
Analysis
45
YTD entries
automatically
annualize
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Comparative
Income
Analysis
46
% Change Gross
Income
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Comparative
Income
Analysis
47
% Change -Taxable
Income
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Comparative
Income
Analysis
48
% Change –
Expenses
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Comparative
Income
Analysis
49
*% of Expenses
compared to
Gross Income
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Comparative
Income
Analysis
**% of Taxable
Income compared
to Gross Income
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Purpose of Cash Flow Analysis
Verify qualifying income that is:
✓ Stable
✓ Likely to continue
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TOOLS FOR
SUCCESS!
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