self-employed borrower: case study part ii: completing the form 91 with business tax returns...

Tax Return Review Using Form 91 Case Study Part 2

©2012 Genworth Financial, Inc. All rights reserved.

Objective

Continuation of Freddie Mac’s Form 91 to calculate‏supportable income for self-employed borrowers using K-1’s and Business tax returns.

Complete Freddie Mac’s Income Analysis Form 91‏

– Income from Partnership and S Corp K-1’s

– Review Business Tax Returns

1 Form 91 Business Returns

Form 91 Business Returns

The Case Study… The Case Study is a married couple John & Mary

Homeowner

Mary receives a W2 & a K 1 from a business she owns

67% of called Zen Today, Inc. We will calculate the

income from the K-1 in today’s session.

Mary also operates a Sole Proprietorship that she

operates out of their home. We calculated that in Case

Study Part I.

John owns 58% of an LLC called Recycle Fitness. The

LLC files a form1065 and issued John a K 1. He declares

unreimbursed expenses against this income. We will

calculate this income in today’s session.

Mary & John also own a Rental Property and a Apple

Orchard. This income was calculated in Case Study Part

I.

2


Income Analysis Form 91

http://freddiemac.com/learn/uw/form_91.html

This is an interactive tool, you can enter data and

The website will do the calculations but remember

Garbage in Garbage out!

3

Cheat Sheet

Form 91 Business Returns 4

Income Analysis Form 91 Cheat Sheet

Completed Sections 1-8 in

Case Study Part I Personal

Returns


Income Analysis Form 91- Partnerships, S Corps

and Corporations-Including K-1s




Ordinary Income or Loss (+/-)_____ (+/-)_______

Net Rental RE Income or Loss (+/-)_____ (+/-)_______

Guaranteed Payments to Partner (+)______ (+/-)_______

9. Partnership Schedule K-1- (Form 1065)

Line 9

2010 2011

7

www.fanniemae.com

Partnerships‏

Income or Loss Reported on IRS Form 1065, Schedule K-1‏

A borrower’s share of income (or loss) from a partnership, LLC, or S‏

corporation is reported on IRS Form 1065, Schedule K-1.

Ordinary income reported on Schedule K-1 may be included in the‏

borrower’s cash flow only if:

– the borrower has a documented, consistent, and stable history of withdrawals or

cash distributions of income from the business,

– the business has positive sales and earnings trends,

– the business has adequate liquidity to support the withdrawal of earnings, and

– the borrower’s ownership and access to the income is documented by a

partnership agreement or corporate resolution.

If the borrower has a two-year history of receiving “guaranteed payments to‏

the partner” from a partnership or a LLC, these payments can be added to

the borrower’s cash flow.

8

:

B3-3.3.1-08, Income or Loss Reported on IRS Form 1065, Schedule K-1 (04/01/2009)

SEB-

Master

http://www.fanniemae.com/

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Business Classifications

Partnership (General or Limited)

Two or More Partners‏

Business Income Reported on Form 1065‏

Personal Income Reported on Schedule E and K-1‏

Income Tax at a Personal Rate‏

All owners are issued a K-1 which is attached to the business tax return or the 1065‏

Advantages

– Taxed at a Personal Rate (Partnership Pays No Tax on Income)

– Limited Partnership - Only Liable for Amount Invested

Disadvantages

– General Partnerships Have Unlimited Personal Liability for Partnership Debts

and Losses



1065 Partnership

Line 22 Ordinary Income

$_________

K1

%


$_________

Schedule E page 2

Part II

Net Income $_______

1040

Line 17 Net Income Sch.E

*$_________

*Taxed at a personal rate

L

11

Form 1065 / Partnership Return

.Five pages long‏

:First page follows the typical tax form pattern‏

– Income listed, deductions taken, taxable income/loss derived.

.Second, third- fifth pages are Schedules‏

– Every partnership completes the schedules, so they are part of the form.


Form 1065 / Partnership Return

Income types listed.

Total on line 8.

Deductions taken away.

Taxable or net profit/loss.



1065 Partnership

Page 30

14


1065 Partnership


$_________

K1

%


$_________

Schedule E page 2

Part II

Net Income $_______

1040


*$_________


L

15


K-1 /Form 1065

Partners % of Ownership

Section J

Ordinary Income/Loss

Line 1

Withdrawals and

Distributions

Section L and Box 19

Guaranteed Payments

to Partners Line 4

Type of Partner (G)

16

Rental and Other Rental

Income/Loss

Lines 2 and 3


1065 Partnership K-1

Page 29

17



Page 29

18


?Did John receive a distribution‏

Page 29


Partnership K1

:Review and Highlight the following areas‏

Review Line G for Type of Partner‏

Review Line J for % of Ownership‏

Review Line #1 for Ordinary Income‏

Review Lines #2 and 3 for Rental Income‏

Review Line #4 for Guaranteed payments to Partner‏

Review Capital Account or Box 19 for Distributions‏



1065 Partnership


$_________

K1

%


$_________

Schedule E page 2

Part II

Net Income $_______

1040


*$_________


L

21

Schedule E page 2


Page 12

22


Let’s try to complete the Form‏

91 Section 9

Page 29




Ordinary Income or Loss (+/-) * -66 (+/-)_______




Line 9

2010 2011

•2010 K1 shows Line 1 -$66 with no distribution

•2011 K1 shows Line 1 $21,346 with $9,000 distribution

*

24



Ordinary Income or Loss (+/-) * -66 (+/-) *9,000




Line 9

2010 2011



*

25


Rental Income from lines 2 and 3‏

Page 29


Rental Income from a business

Form 8825 Partnership or S Corp Rental Income‏

– Should be attached to the K-1 for either the partnership or S Corp

– Income bypasses the form 1065 or 1120S and flows right to the K-1 and onto the personal tax returns

– Similar to Schedule E rental income from the personal tax returns

– Income may be used if verified recurring (property still owned and has not been sold by the business)

– Use as additional income for the business ONLY if needed

– Income is taken from line 2, subtract line 16 (total expenses) and add back depreciation (line 14) for each property (2010 form)

– Always check investor guidelines if a two year history is required and if the full PI is required to be verified and included in your rental calculation

The business is a real estate business if your business return is blank with no

income but there is a K-1 provided with income listed on lines 2 and/or 3 of the

Form K-1.


Rental Income from a business


No Example in your Case Study



Page 29

29




Net Rental RE Income or Loss (+/-)____0 (+/-)_____0

Guaranteed Payments to Partner (+)_____0 (+/-)____ _0


Line 9

2010 2011



*

30







2010 2011

31






UPE Expenses (-)$12,676 (-)___ __0


2010 2011

32






UPE Expenses (-)$12,676 (-)$15,222


2010 2011

33






UPE Expenses (-)$12,676 (-)$15,222


2010 2011

$-6,222 $-12,742

34


1065 Partnership


$_________

K1

%


$_________

Schedule E page 2

Part II

Net Income $_______

1040


*$_________


L

35

Solvency

Quick Ratio‏

Also called the acid test ratio‏

Excludes inventory; includes only the most liquid assets‏

Indicates how quickly a Co. can pay its current obligations without‏

relying on future sales or its ability to meet its near term obligations

.Rule of thumb: $1.00 to $1.00; then the Co. is considered liquid‏

Important: What is the industry standard?

As the ratio gets smaller, paying bills becomes more difficult and a‏

cash withdrawal could be devastating

*Cash + Accounts Receivable + Other Current Assets =

Current Assets

Total Current Liabilities

*Cash includes all current assets

36 SAM

Form

Business

Tax

Returns

April 2013


Solvency

(Cash + Accounts Receivable) + Current Assets -

Total Current Liabilities

{ {

Are there assets to support a withdrawal and/or a larger withdrawal?

Every Business

Return will include a

2 Year Balance

Sheet as Schedule L

37


Solvency/Liquidity

Page 34

38


Solvency- 1065 Current Ratio‏

– Current Assets (Cash #1 + Acct Recv. #2 + Cur. Assets #6

– Current Liabilities (Acct Pay. #15 + MNB #16 + Other Cur.Liab #17

Current Assets #32,649 + 12,276 + 0= $44,925

Current Liabilities $77,597 + 0 + 0= $77,597

Page 34

$-32,672

39



Depreciation (+)__ _ __

Depletion (+)__ _ _ _

Amortization or Casualty Loss (+)__ _ __

Mort, Notes, Bonds Payable <1 year (-)___ __

Other Nonrecurring Income or Loss (+/-)____ _

Meals and Entertainment Exclusion (-)__ _

Sub-Total =___ __

Multiply Total by % of Ownership (on K-1) (x)_____

Partnership Total =____ _

11. Partnership Income from Form 1065

Lines 11, 12 and 13

40


1065 Partnership

Page 30

41



Depreciation (+) 0

Depletion (+)__ _ _ _





Sub-Total =___ __




Lines 11, 12 and 13

42


1065 Partnership

Page 30

43



Depreciation (+) 0

Depletion (+) 0





Sub-Total =___ __




Lines 11, 12 and 13

44


1065 Partnership

Page 30

The statement must be reviewed to determine if “other deductions include amortization and/or casualty

losses. None have been identified in this return.

45



Depreciation (+) 0

Depletion (+) 0

Amortization or Casualty Loss (+) 0

Mort, Notes, Bonds Payable <1 year (-)_______

Other Nonrecurring Income or Loss (+/-)______

Meals and Entertainment Exclusion (-)________

Sub-Total =_________

Multiply Total by % of Ownership (on K-1) (x)_______

Partnership Total =_________


Lines 11, 12 and 13

46


1065 Partnership Balance Sheet

Page 34

47



Depreciation (+) 0

Depletion (+) 0


Mort, Notes, Bonds Payable <1 year (-)_____0

Other Nonrecurring Income or Loss (+/-)_____

Meals and Entertainment Exclusion (-)_______

Sub-Total =________

Multiply Total by % of Ownership (on K-1) (x)______

Partnership Total =________


Lines 11, 12 and 13

48


1065 Partnership

Page 30

49



Depreciation (+) 0

Depletion (+) 0


Mort, Notes, Bonds Payable <1 year (-)______0

Other Nonrecurring Income or Loss (+/-)____0

Meals and Entertainment Exclusion (-)________





Lines 11, 12 and 13

50


1065 Partnership

Page 34

51



Depreciation (+) 0

Depletion (+) 0




Meals and Entertainment Exclusion (-)______0





Lines 11, 12 and 13

52



Depreciation (+) 0

Depletion (+) 0




Meals and Entertainment Exclusion (-)______0

Sub-Total =_______0

Multiply Total by % of Ownership (on K-1) (x)58.3

Partnership Total = 0


Lines 11, 12 and 13

53


S Corporation

Can be owned by one person‏

Often owners pay themselves a salary draw‏

Business Income Reported on Form 1120S‏

Personal Income on Form 1040’s (Schedule E, could also be W-2 wage or 1099‏

income)

All shareholders of an S Corp are issued K-1’s and are attached to the S Corp tax‏

return or form 1120s.

Advantages

– Taxed on Personal Basis (S Corp. Pays No Tax on Income)

– Liability Limited to Amount Invested

Disadvantages

– Limit of 100 Shareholders


Form 1120S / S-Corp Return

.Four pages long‏

:First page follows the typical tax form pattern‏

– Income listed, deductions taken, taxable income/loss derived.

.Second, third, and fourth pages are Schedules‏

– Every S-Corp completes the schedules, so they are part of the form.

.Very similar to Partnership return‏


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1120S Corporation


$_________

K1

%


$_________

Schedule E page 2

Part II

Net Income $_______

1040


*$_________


H

57

Form 1120S / S-Corp Return

Income types listed.

Total on line 6.

Deductions taken away.

Taxable or net profit/loss.



1120S

Page 36

59


K-1 /Form 1120S

Shareholder’s % of Ownership

Section H

Ordinary Income/Loss

Line 1

60


1120S K1

Page 35

61


1120S K1

Page 35

• Did Mary receive a distribution?

62

1120S Page 3


Page 38

63

1120S Page 4


Page 39

64



Ordinary Income or Loss (+/-)*83,012 (+/-)338,882


10. Partnership Schedule K-1- (Form 1120S)

Line 9

2010 2011

•2010 K1 shows Line 1 $99,882 with a distribution of $83,012

•2011 K1 shows Line 1 $502,619 with a $338,882 distribution

*

65


1120S K1

Page 35

66




Net Rental RE Income or Loss (+/-)0 (+/-) 0


Line 9

2010 2011



*

67


Solvency- 1120S Current Ratio‏

– Current Assets (Cash #1 + Acct Recv. #2 + Cur. Assets #6

– Current Liabilities (Acct Pay. #16 + MNB #17 + Other Cur.Liab #18

Did Zen have any additional liquid assets to distribute the to the

Shareholders?

Current Assets $332,273 + $0 + $90,687= $442,960

Current Liabilities $0 + $230,000 + $2,324= $232,324

Yes $210,636 Page 39

68




Net Rental RE Income or Loss (+/-)0 (+/-) 0


Line 9

2010 2011



*

69


Income Analysis Form 91- Partnerships, S Corps

and Corporations

70



Depreciation (+)_____

Depletion (+)_____

Amortization or Casualty Loss (+)_____


Other Nonrecurring Income or Loss (+/-)____

Meals and Entertainment Exclusion (-)______

Sub-Total =_______


S-Corporation Total =_________

12. S-Corporation Income from Form 1120s

Lines 11, 12 and 13

71


1120S

Page 36

72



Depreciation (+)16,638

Depletion (+)_____





Sub-Total =________

Multiply Total by % of Ownership (on K-1)(x)______

S-Corporation Total =________


Lines 11, 12 and 13

73


1120S

Page 36

74




Depletion (+)____ 0





Sub-Total =_______

Multiply Total by % of Ownership (on K-1)(x)_____

S-Corporation Total =_______


Lines 11, 12 and 13

75


1120S

Page 36

The statement must be reviewed to determine if “other deductions include amortization and/or casualty

losses. None have been identified in this return.

76




Depletion (+) 0





Sub-Total =_______




Lines 11, 12 and 13

77

1120S Page 4


Page 39

78




Depletion (+) 0


Mort, Notes, Bonds Payable <1 year (-) 230,000



Sub-Total =_______




Lines 11, 12 and 13

79


1120S

Page 36

80




Depletion (+) 0



Other Nonrecurring Income or Loss (+/-) ____0


Sub-Total =________


S-Corporation Total =________


Lines 11, 12 and 13

81


1120S

Page 39

82




Depletion (+) 0



Other Nonrecurring Income or Loss (+/-) 0

Meals and Entertainment Exclusion (-)10,117

Sub-Total =

Multiply Total by % of Ownership (on K-1) (x)

S-Corporation Total =


Lines 11, 12 and 13

-$223,479

67%

-$149,730

83


Corporation

No Limit on Number of Stockholders‏

Business Income Reported on Form 1120‏

Personal Income Reported on Form 1040 (Dividends on Schedule B, or W-2 Wage or‏1099 income)

Taxed at a Corporate Rate‏

Advantages

– Personal Liability Limited to Amount of Investment

– Owners Not Personally Liable for Debts and Losses of the Business

– Easy to Transfer Ownership (Selling Shares of Stocks)

Disadvantages

– Double Taxation

– Most Costly to Form

– If 1120 shows a loss and you are using income the business (such as a W-2 wage or 1099 income), you must account for the business loss regardless of the percent of ownership

– Check your policy as far as the use of Corporate income to qualify


Genworth Guidelines

Genworth guidelines can be found at‏

http://www.mortgageinsurance.genworth.com


http://www.mortgageinsurance.genworth.com/

Genworth Guidelines


Legal Disclaimer

Genworth Mortgage Insurance is happy to provide you with these training‏

materials. While we strive for 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.

,GENWORTH EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES‏

EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF

MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH

RESPECT TO THESE MATERIALS AND THE RELATED TRAINING. IN NO

EVENT SHALL GENWORTH BE LIABLE FOR ANY DIRECT, INDIRECT,

INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES OF ANY KIND

WHATSOEVER WITH RESPECT TO THE TRAINING AND THE MATERIALS.

‏

87 ©2012 Genworth Financial, Inc. All rights reserved.

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