Understanding Borrowers’
Personal Tax Returns
Tim Harrington, CPA
T.E.A.M. Resources
7049 East Tanque Verde, PMB 136
Tucson, AZ 85715
(800) 788-9542
tharrington@forTeamResources.com
www.forTeamResources.com
Presented By Tim Harrington
Tim Harrington is a Certified Public
Accountant who has taught lending
personnel how to make good loans since
1992. Since 1996, Tim has been President of
TEAM Resources, a firm that provides
consulting, strategic planning and training to
financial institutions from coast-to-coast.
He is the author of the popular lending
software Lenders Tax Analyzer. Tim is a
faculty member of two national financial
professional schools on finance and lending,
and has spoken to tens of thousands of
consumer, mortgage and commercial lending
personnel throughout the US
2
2
Lenders Tax Analyzer
©
3
3
Form
1040
Focus on this part
of the form
Lines 7 through 21
Possibly Subtract the
identified items.
IGNORE All the other
lines.
4
What are you looking for in a
tax return?
1. How much cash is borrower really
earning!
2. What is the earnings trend
(2 or 3 years)
3. Is the income recurring?
Get the whole return.
4
Sales/Capital Gains
Schedule D and Form 4797
Rental/Royalty Income
Schedule E, Page 1
Form 1040
Sole Proprietorship
Schedule C
Investment Income
Schedule B
Individual Income
Tax Return
Pension Incomes
Divorce Income
Tax Exempt Interest
Tax Refunds
Unemployment Comp
Social Security
Other Income or <Loss>
Less Unreimbursed
Employee Expenses
Partnership & S Corp
Schedule E,
Page 2
Farm Income
Schedule F
6
Taxable interest and dividends: See
Schedule B
2,600
5,400
Lotto = 200, Net Operating Loss=(2,000)
7
6
Tax-exempt interest is not taxed and not
included in taxable income by IRS. But for
us it is extra ‘qualifying’ income. WE ADD
IT.
5,400
Lotto = 200, Net Operating Loss=(2,000)
8
7
Taxable refunds are not an income and are
‘always’ ignored.
You wouldn’t include them for a wage
earner, why consider them for a selfemployed person
5,400
Lotto = 200, Net Operating Loss=(2,000)
9
8
Include Alimony if continuing… AND being
paid. If not, ignore. See following screen
for other divorce incomes that might be
additional qualifying incomes.
2,600
5,400
Lotto = 200, Net Operating Loss=(2,000)
10
9
Other Divorce Income
You Might Add
The following incomes are not taxable but are real
cash flows that could be used to pay loan
payments. Since they are not taxable, they are
not found on the tax return.
If this income will last ‘long enough’ and is in fact
being received, you may add:
• Child Support
• Separate Maintenance Income
• Division of Assets: amount paid by one former spouse
to other former spouse for value of assets that could not
11
be physically divided (a house for instance)
10
Retirement incomes: lines 15, 16 and 20.
Each of these may have an untaxed
amount. If the ‘a’ box is higher than the ‘b’
box, use the amount in the ‘a’ box.
2,600
5,400
Lotto = 200, Net Operating Loss=(2,000)
12
11
Unemployment compensation: if it is
recurring, add it. If not recurring, ignore it.
5,400
Lotto = 200, Net Operating Loss=(2,000)
13
12
Other income: look and see if the income is
recurring. If so, keep it, otherwise ignore it.
NOL or Net Operating Loss, is the carrying
forward of a loss that occurred in the past.
Always ignore NOL.
5,400
Lotto = 200, Net Operating Loss=(2,000)
14
14
NOL = Net Operating Loss Carryover. This
is a carryover to this tax year from some
previous tax year. Always ignore it.
5,400
Lotto = 200, Net Operating Loss=(2,000)
15
15
2,600
5,400
Lotto = 200, Net Operating Loss=(2,000)
With no adjustments, this would
be borrower’s monthly income.
(But there are other adjustments)
$105,991/12 =
16
$8,833 per month
Lenders Tax Analyzer Comparison Worksheet - 2011 Tax Return
Borrower's Name:
Note: Please complete only items with white boxes. All
other cells are populated with information from other
sheets.
1
ORIGINAL
TAX
RETURN
Wages
In order to complete a Lenders Tax Analyzer report, you will
need:
• Form 1040
• If borrower has Partnership Income: a Schedule K-1 for each
partnership
• If borrower has S-Corp Income: a Schedule K-1 or a history o
distributions the borrower took from the S-Corp. The
distributions paid to S-Corp shareholders are not reliably
reported on K-1s
ADJUSTED
CASH
FLOW
45,000
45,000
1
Form 1040, line 7
2
3
Wage Update (Be sure to update Wages using most recent info)
Obtain from borrower, not from tax return
Taxable Interest
2
7,900
6,100
3
2,100
4
565
5
Form 1040, line 8a
4
Tax-exempt Interest
Moving Around the Screen:
• The ENTER key will move to the next appropriate space.
• Use the TAB key to move one space to the right.
• Use the Arrow keys to move in the direction of the Arrow.
Form 1040, line 8b
5
Ordinary Dividends
4,169
Form 1040, line 9a
6
Taxable Refunds
335
6
Form 1040, line 10
7
Alimony Received
1,450
1,450
7
Form 1040, line 11
8
Child Support
8
Obtain from borrower, not from tax return
9
10
Other Divorce Income (Separate maintenance, division of assets, etc)
Obtain from borrower, not from tax return
Business Income Schedule C
9
(1,644)
2,804
10
15,679
10,266
11
0
12
2,600
13
Form 1040, line 12
11
Capital gain or (Loss) Schedule D
Form 1040, line 13
12
Other Gains Form 4797
Form 1040, line 14
13
IRA Distributions
Form 1040, line 15
14
From line 15a
From line 16b
From line 16a
Pensions and Annuities
Form 1040, line 16
15
1,600
From line 15b
Rental / Royalty Income
14
31,717
23,638
15
24,900
16
Form 1040, line 17
16
Partnership / S-Corporation Income
From Schedule E, Page 2
17
Farm Income or (Loss) Schedule F
(815)
(20)
17
Form 1040, line 18
18
Unemployment Compensation
18
Form 1040, line 19
19
Social Security Benefits
Form 1040, line 20
20
Other Income
2,400
From line 20b
5,400
19
From line 20a
(1,800)
0
20
Form 1040, line 21
21
Unreimbursed Employee Business Expense
22
Annual Gross Cash Flow
23 Monthly Gross Cash Flow (line 22 divided by 12)
(2,152)
21
105,991
$
122,651
22
8,833
$
10,221
23
-
17
FORM 1040
Likely Incomes
Wages ……………………Get these via current pay stub
Interest income…………..If recurring, add it
If non-recurring, ignore
(see Schedule B)
Tax exempt interest……..If recurring, add it
If non-recurring, ignore
Dividends…………………. If recurring, add it
If non-recurring, ignore
(see Schedule B)
Taxable refunds………….Always ignore
Alimony……………………If recurring, add it
If non-recurring, ignore it
Other divorce income……Add if recurring (not found on
return)
18
17
FORM 1040
Likely Incomes
IRA distributions…………Add ‘Total’ amount, NOT ‘Taxable’
Pension distributions……Add ‘Total’ amount, NOT ‘Taxable’
Unemployment Comp…..If recurring, add it
If non-recurring, ignore it
Social security …………. Add ‘Total’ amount, NOT ‘Taxable’
Other income…………….WATCH FOR:
Net Operating Loss (NOL) carryover…..ignore
Income that won't recur…………....Ignore
Income that will recur………………..Add it
Expenses from Form 2106…Subtract
Expenses for Alimony Paid…Subtract (possibly)
19
18
Schedule B
If you see any Interest Income here that
has come from a K-1 (partnership or S
Corp), IGNORE that income. It is
Phantom Income to the individual.
Interest and
Dividend
Income
If you see any Dividend Income here that
has come from a K-1 (partnership or S
Corp), IGNORE that income. It is
Phantom Income to the individual.
09-07
09-07
20
22
If you see any Interest Income here that has come from a K-1
(partnership or S Corp), IGNORE that income. It is Phantom
Income to the individual.
Are these amounts going to recur in the future? If
yes, then add. If not, ignore.
21
23
Chevron stock was sold this tax year
Are these amounts going to recur
in the future? If yes, then add. If
not, ignore.
If you see any Dividend Income here that has come
from a K-1 (partnership or S Corp), IGNORE that
income. It is Phantom Income to the individual.
09-07
09-07
22
24
Schedule B
Interest and Dividend Income
• Interest income that will recur:
Add
• Interest income that won’t recur:
Ignore
• Interest income from K-1:
Ignore
• Dividend income that will recur:
Add
• Dividend income that won’t recur: Ignore
• Dividend income from K-1:
Ignore
23
25
Types of Business Entities
• Sole Proprietorship
– Schedule C on 1040
• Partnership
– 1065 (Ask for K-1)
• Corporation
– 1120
• S Corporation
– 1120S (Ask for K-1,
may be useful, may
not)
• Limited Liability
Partnership (LLP)
– 1065 – Taxed just like
a partnership (K-1)
• Limited Liability
Company (LLC)
– Depends – Taxed on
form for a partnership,
or sole proprietorship,
or an S Corp
24
27
How Income Comes Out of a
Business
Sole Proprietorship
- The owner and the business are inseparable.
The person is the business and the business is
the person
- Pays taxes through the individual’s tax return.
- The Adjusted Net Profit from Schedule C is
considered real cash flow
25
28
Business Income: See Schedule C
But be aware that Depreciation may be in
here and we always add back depreciation
26
29
09-07
Schedule
C
Sole Proprietor
business income
27
30
28
Depreciation,
Depletion or
Amortization:
These are always
added back.
29
32
SCHEDULE C
Depreciation, Depletion or Amortization
• These all represent a non-cash expense that is
deducted from taxable income, but does not
reduce the borrower’s cash flow.
• Depreciation and amortization represent the
gradual ‘wearing’ out of some asset you have
purchased. The business is allowed to write off
the cost of the asset little by little over the years
as it wears out.
• Depletion is the ‘using up’ of a natural resource,
like gravel or oil.
30
33
SCHEDULE C
Car and Truck Expense (line 9)
If the borrower used the Standard Mileage Method…
You may be able to add back 40% of the Car and Truck expense
reported on this line
– Only add back if the borrower used the Standard Mileage
Method
– The Standard Mileage Method allows the taxpayer to deduct an
amount based on business miles driven during the year times
so many cents per mile.
– We suggest using about 40%of the amount on line 9. The ratio
fluctuates from year to year but we suggest using 40% as a
useful rule-of-thumb.
Ask borrower, “Did you use the actual expense method or the
Standard Mileage method?” If they used the mileage method,
you may add 40% of the amount on line 9 as additional cash
flow.
If you aren’t sure of if borrower used the standard mileage method,
31
do not add any amount back from line 9. Simply ignore it.
35
Car and Truck Expense (line 9)
Standard Mileage Rates
If you would like to be more precise, following are the percentages
of the mileage method you may consider adding back:
• In 2011 there were two different rates:
• Jan 1 to June 30: 51 cents, July 1 to Dec. 31: 55 cents
• 22 cents was depreciation for both periods or 43% and 40% respectively
• In 2010 about 46% (23 cents out of 50 cents) of that amount is
considered by IRS to be depreciation.
• In 2009 about 38% (21 cents out of 55 cents) of that amount is
considered by IRS to be depreciation.
• In 2008 about 42% (21 cents out of 50.5 cents) of that amount
is considered by IRS to be depreciation.
• In 2007 about 39% (19 cents out of 48.5 cents) of that amount
is considered by IRS to be depreciation.
32
35
Delivery Truck
$32,000 Loan
term: 48 months @
$700/mo P & I
Annual cost: $8,400
Interest:
$2,500
Principal:
$5,900
33
Borrower’s Payments
per Application
Home mortgage
Auto loan
Credit card
Subtotal
Delivery truck payment
Total payments
$1,700
400
200
$2,300
700
$3,000
34
2,600
5,400
Lotto = 200, Net Operating Loss=(2,000)
With no adjustments, this would
be borrower’s monthly income.
(But there are other adjustments)
$105,991/12 =
35
$8,833 per month
Without adjustment:
Home mortgage
Auto loan
Credit card
Subtotal
Delivery truck payment
Total payments
Effect of Payment on both sides
$1700
400
200
$2300
700
$3000
$700
Payment
Include w/
other pmts
Monthly payments = $3,000
Monthly income =
$8,833
Interest Add Back Method
Include
Payment
w/other
payments
Monthly payments = $3,000
Monthly income =
$9,041
Subtract Principal Method
Total
$1700
400
200
$2300
Add back
Interest
expense
Debt ratio:
34%
Debt ratio:
33%
Remove
Payment
Monthly payments = $2,300
Monthly income =
$8,341
Home mortgage
Auto loan
Credit card
Interest
expense not
added back
to return
Let interest stay
on return as an
expense and
Subtract
Principal
Debt ratio:
28%
36
IRS allows
deduction of 50%
of amount actually
spent (shown
here). We want to
subtract the other
50%. So…subtract
this amount
‘again’.
37
SCHEDULE C
Meals and Entertainment Expense
(line 24)
• The IRS only allows ½ (50%) of Meal and
Entertainment expenses to be deducted on the
tax return
• Therefore, we calculate the other ½ and
subtract it.
• Why? We assume that the full amount was
actually spent, namely, the cash was paid out by
our borrower, so even if it will not help them
show a lower income for tax purposes, we want
to lower their income by the disallowed portion.
• Subtract the same amount that is already
reported on line 24 b
38
45
Schedule C Worksheet - 2011 Tax Return
Profit and Loss from Business - Sole Proprietorship
0
HAPPY COOKER
Entity 1
1
Net Profit or (Loss)
Entity 2
Entity 3
Entity 4
(1,644)
From Schedule C, Part II, line 31
2
Add Back Depreciation in Car & Truck Expense
Part of amount on line 9 [See note 1 below]
3
Add Back Depletion
From line 12
4
Add Back Depreciation
3,500
From line 13
5
INTEREST ADD BACK METHOD (EBIDA) - Typically for use when interest is from non-real estate loans.
Add Back Mortgage Interest Expense
From line 16a
6
Add Back Other Interest Expense
2,500
From line 16b
Or
7
SUBTRACT PRINCIPAL METHOD - Typically for use when interest is from mortgage loans.
Subtract Principal Paid
Calculate principal in Note 2 below
After Completing ONE of the Interest Methods Proceed to Line 8.
(1,552)
8 Subtract Non-Deductible Meals and Entertainment
From line 24b [See note 3 below]
9
Add Back Expenses for Business Use of Home
From line 30
10
Adjusted Income (Loss) per Property
11
Adjusted Income (Loss) from all Schedule Cs
Carries to Comparison Worksheet
2,804
$
2,804
0
0
0
39
46
SCHEDULE C
SOLE PROPRIETORSHIP
Depletion………………………… Always add back
Depreciation…………………..… Always add back
Amortization…………………….. Always add back
Watch for depreciation hidden in Car & Truck expense
Interest expense……………….. Don't double hit
borrower. Use Interest Add Back Method or
Subtract Principle Method.
Non-deductible meal and entertainment
expense………………………. Subtract
Office in Home…………………. Probably add back40 47
Schedule
D
Capital Gains
and Losses
Gains and
losses from
the sale of
‘something’
41
48
Top Half of Schedule D
42
Bottom Half of Schedule D
43
50
44
50
SCHEDULE D: Capital Gains or
Losses
These gains and losses are USUALLY ONE TIME
SALES and will not have an effect on future
earnings (not recurring), therefore, we act as if
they never occurred by IGNORING them.
• Gains or losses: (short-term or long-term)
Gains:………………..………… Usually ignore
Losses:………………………… Usually ignore
HOWEVER: If it the gain or loss is recurring, consider
adding gain or loss. Look at the borrower’s history.
45 51
FORM
6252
If recurring,
add this.
Line 22
This amount
passes through
to Sched D, but
we ignore it and
pick up line 22
instead.
09-07
If recurring,
add this
Gain or Loss
from
installment
sales
These are
gains or
losses that
may be
recurring
46
52
If recurring, add
this. This is the
actual cash
flow from
PRINCIPLE
received from
this sale.
Interest
received shows
up on Sched B
47
Zero here, because the gain from
sale of stock was NOT ‘recurring’
48
54
FORM 6252: Installment Sale Income and
FORM 4797: Sale of Business Property
These may show gains or losses that are
recurring:
Installment sale: USUALLY RECURRING. Add
the gain or loss as cash flow if the term of the
installment sale agreement will continue for a
“while longer”.
ASK! “How much longer will you be receiving
installment sale income?” Ask to see the
Installment Sale Agreement if need be.
49
56
FORM 6252 and FORM 4797
• If borrower has an installment sale: Go to the
FORM 6252 or FORM 4797. This will tell you the
real amount of cash flow, not the taxable
amount.
• The taxable amount is often lower than the real
cash flow the borrower is receiving. You want the
real cash flow.
50
57
Line 17 has several potential forms of
income, see Schedule E
5,400
Lotto = 200, Net Operating Loss=(2,000)
51
2,600
5,400
Lotto = 200, Net Operating Loss=(2,000)
With no adjustments, this would
be borrower’s monthly income.
(But there are other adjustments)
$105,991/12 =
52
$8,833 per month
Schedule
E, Page 1
Rental and
Royalty Income
53
Schedule E, Page 1 Worksheet - 2011 Tax Return
Rental Real Estate and Royalty Income
0
Property 1
Property 2
Property 3
Property 4
Property 5
Name of Property OIL RESERVES DUPLEX
1
Income or (Loss) as Reported
7,630
(308)
From line 21
Adjustments
INTEREST ADD BACK METHOD (EBIDA) - Typically for use when interest is from non-real estate loans.
2 Add Back Mortgage Interest Expense
From line 12
3
Add Back Other Interest Expense
From line 13
Or
4
SUBTRACT PRINCIPAL METHOD - Typically for use when interest is from mortgage loans.
Subtract Principal Paid
(3,299)
Calculate principal in Note 1 below
After completing ONE of the Interest Methods proceed to Line 7.
5
Add Back Depreciation or Depletion
7,500
12,115
15,130
8,508
From line 18
6
Other Adjustments
7
Net Cash Flow
8
Adjusted Income for Schedule E, Page 1
Carries to Comparison Worksheet
0
$
0
0
23,638
54
Rental House:
Monthly Payment $800
$800
X 12
$9,600
Less INT $6,301
Principal $3,299
55
Without adjustment:
Home mortgage
Auto loans
Other
Subtotal
Rental Mortgage pmts
Total payments
$2700
800
500
$4000
800
$4800
$800
Payment
Include w/
other pmts
Monthly payments = $4,800
Monthly income =
$8,833
Interest Add Back Method
Include
Payment
w/other
payments
Monthly payments = $4,800
Monthly income =
$9,358
Add back interest of $525
$8.833 + $525 = $9,358
EBIDA
Add back
Interest
expense
Debt ratio:
51%
Effect of Payment on right side only
Subtract Principal Method
Remove
Payment
Monthly payments = $4,000
Monthly income =
$8,558
Subtract Principal of $275
$8,833 - $275 = $8,558
Debt ratio:
54%
Interest
expense not
added back
to return
Let interest stay
on return as an
expense and
Subtract
Principal
Debt ratio:
46%
56
56
When to use Interest Add Back
Method or Subtract Principal
Method
Subtract Principal Method is best used when the asset
financed is generating a direct cash flow which covers
the monthly payment. (e.g. Rental properties)
Rental properties will often be most fairly treated by using
Subtract Principal Method. Why? Because the
property being mortgaged is generating rental income.
There is a direct correlation between income generated
and interest expense. The income ‘washes’ against the
expense.
Interest Add Back Method (EBIDA) should be used most
other times.
57
Rental House:
Monthly Payment $800
$800
X 12
$9,600
Less INT $6,301
Principal $3,299
58
Schedule E, Page 1 Worksheet - 2011 Tax Return
Rental Real Estate and Royalty Income
0
Property 1
Property 2
Property 3
Property 4
Property 5
Name of Property OIL RESERVES DUPLEX
1
Income or (Loss) as Reported
7,630
(308)
From line 21
Adjustments
INTEREST ADD BACK METHOD (EBIDA) - Typically for use when interest is from non-real estate loans.
2 Add Back Mortgage Interest Expense
From line 12
3
Add Back Other Interest Expense
From line 13
Or
4
SUBTRACT PRINCIPAL METHOD - Typically for use when interest is from mortgage loans.
Subtract Principal Paid
(3,299)
Calculate principal in Note 1 below
After completing ONE of the Interest Methods proceed to Line 7.
5
Add Back Depreciation or Depletion
7,500
12,115
15,130
8,508
From line 18
6
Other Adjustments
7
Net Cash Flow
8
Adjusted Income for Schedule E, Page 1
Carries to Comparison Worksheet
0
$
0
0
23,638
59
SCHEDULE E, PAGE 1
RENTAL AND ROYALTY INCOME
Start with Income or Loss as reported on Line 21
Then, make adjustments:
Depreciation………………… Add back
Depletion…………………….. Add back
Principal………………………Calculate and subtract
be sure to exclude the related Monthly
Payment in the Debt Ratio Calculation
Probably use the Subtract Principal Method in order to
get a fairer debt ratio calculation.
60
Partnerships and S Corporations
61
Types of Business Entities
• Sole Proprietorship
– Schedule C on 1040
• Partnership
– 1065 (Ask for K-1)
• Corporation
– 1120
• S Corporation
– 1120S (Ask for K-1,
may be useful, may
not)
• Limited Liability
Partnership (LLP)
– 1065 – Taxed just like
a partnership (K-1)
• Limited Liability
Company (LLC)
– Depends – Taxed on
form for a partnership,
or sole proprietorship,
or an S Corp
62
27
How Income Comes Out of a
Partnership
Partnership is a ‘pass-through’ entity. Partnership
does not pay taxes directly. The taxable income is
passed-through to the owners’ personal tax returns.
The amounts showing up on the Form 1040 do not
mean the borrower received this money. Therefore,
the income passing-through onto the 1040 is
useless
Instead: Go to the K-1 and find the following:
- Income: draws or distributions
- Outflow: contributions
- Guaranteed Payments (positive cash flow)
- UPE - Unreimbursed Partnership Expenses
(negative cash flow)
63
What is a Pass-Through Entity?
Partnerships and S-Corps are
Pass-Throughs
Partnership
or S Corp
Tax Return
$1,000
Form 1040
Individual’s
Income
Tax Return
$500
Schedule K-1
Transmittal
Schedule K-1
Transmittal
$500
$500
A pass-through entity is not
taxed.
The income is ‘passed-thru’ to
the individual owners, and the
business income shows up on
the individual’s tax return.
Form 1040
Individual’s
Income
Tax Return
$500
64
How Income Comes Out of an
S Corporation
S Corporation: An S Corporation is regular
corporation that under special IRS rules is taxed
like a partnership (pass through). Owner may
receive wages and/or dividends/distributions.
- Wages: appear on pay stub, W-2 or 1040
- Dividends/Distributions: S Corporation
dividends/distributions are NOT taxable.
Therefore, they are not on the Form 1040. They
can be hard to verify.
65 65
How to Verify S Corp Income
S Corporation – Dividends or Distributions:
Sched K-1 Line 16D may report Distributions
If line 16D is blank the other way to verify receipt
is:
1. Look at S corporation’s General Ledger under
equity accounts. Should show dividends paid
2. Obtain check stubs from dividend checks
written to owner
3. Obtain cancelled checks of dividend payments
66
66
Schedule
E, Page 2
Partnership and
S Corporation
income
This information is
probably all useless
information for cash
flow. Ignore it.
67
A & D = Ordinary Income from K-1. Phantom income. Do not include for Individual cash flow
B = Guaranteed Payments – This is a true positive cash flow. Include in the individual’s income.
C = UPE or Unreimbursed Partnership Expenses – These are out of pocket expenses a partner
paid that the partnership did not reimburse. It is a true negative cash flow. Deduct from the
68
individual’s income.
Schedule K-1
Partnership
FORM 1065
Ignore most income or expense
in Part III
Most are ‘pass-through items
A NOTABLE EXCEPTION!!!
Guaranteed Payments:
Guaranteed payments are similar to
‘wages’ paid to a partner. If a partner
receives Guaranteed Payments, he
will report the amount as ‘Ordinary
Income’ on Schedule E, Page 2.
This is REAL CASH FLOW to the
individual!!!.
Therefore, if you see Guaranteed
Payments on a K-1 and/or on
Schedule E, Page 2 be sure to
add the amount as Cash Flow to
69
the individual.
69
Schedule K-1 Partnership
FORM 1065
This amount is what shows up on the
borrower’s tax return, but it is not ‘spendable’
income, it is taxable income. Ignore this line.
70
Schedule K-1 Partnership
FORM 1065
The useful information:
Line L: Contributions: Negative Cash flow
Money going from the
individual partner to the
Partnership. It is a
NEGATIVE Cash Flow to
the Individual.
Money coming from the
Partnership to the
individual partner. It is a
POSITIVE Cash Flow to
the Individual.
The useful information:
Line L: Withdrawals: Positive Cash flow or
‘Spendable income’
71
Schedule E, Page 2 and Schedule K-1 Worksheets - 2011 Tax Return
Partnerships and S-Corporations
0
For Partnerships
Partnership 1
Name
Partnership 2
Partnership 3
Partnership 4
Partnership 5
YELLOW RDS
From Schedule E, Page 2, line 28
1 Unreimbursed Partner Expense (UPE)
2 Guaranteed Payments
(4,500)
18,000
From Schedule K-1, Form 1065
3 Capital Contributed During the Year
From Schedule K-1 (Form 1065) line L
4
Withdrawals & Distributions
8,400
From Schedule K-1 (Form 1065) line L or 19A
5
6
Net Cash Flow from Business
21,900
Net Cash Flow from all Partnerships
0
0
0
0
21,900
For S-Corporations
S-Corp 1
Name
7
Dividends or Cash Distributions
S-Corp 2
S-Corp 3
S-Corp 4
S-Corp 5
TINY CORP
3,000
From Schedule K-1 (Form 1120S) line 16d, or from check stubs, G/L history of payments, or a
history of deposits. Cash Distributions will not always be included. Only include it if you can
determine the borrower received it in "cash".
8
9
Net Cash Flow from all S-Corporations
3,000
Total Adjustments from Partnerships and S-Corporations
Carries to Comparison Worksheet
$
24,900
72
Schedule K-1
S-Corporation
FORM 1120S
Ignore most income or expense
in Part III
Most are ‘pass-through items
A NOTABLE EXCEPTION!!!
Line 16 D, Distributions:
Distributions are probably REAL
CASH FLOW!!!. Amounts here will
not appear on Schedule E, Page 2
or anywhere else. But you should
Add this amount as cash flow.
Therefore, if you see an amount
on line 16D, be sure to add the
amount as Cash Flow.
NOTE: These distributions could
also be ‘non-cash’ distributions,
such as taking inventory, equipment
or a vehicle. You may want to
confirm with the borrower that they
took this in cash or converted
whatever they received into cash.
73
73
Schedule K-1
S-Corporation FORM 1120S
Line 16D may report Distributions to shareholder
74
01/01/XX
Beginning Balance
3/31/XX
6/30/XX
9/30/XX
12/31/XX
Dividends paid
Dividends paid
Dividends paid
Dividends paid
12/31/XX
Net Income
5,000
If line 16D is
blank, ask your
borrower if they
took money out
of the S-Corp in
the form of
dividends or
distributions, and
can they verify
them via:
12/12/XX
Ending Balance
7,300
Could be verified with:
Tiny Corporation, Inc.
General Ledger History
Shareholders Equity
5,300
750
750
750
750
$3,000
Check stubs/cancelled
checks
G/L history of Corporation’s
Equity (Capital), payments to
shareholder
Check register
75
Schedule E, Page 2 and Schedule K-1 Worksheets - 2011 Tax Return
Partnerships and S-Corporations
0
For Partnerships
Partnership 1
Name
Partnership 2
Partnership 3
Partnership 4
Partnership 5
YELLOW RDS
From Schedule E, Page 2, line 28
1 Unreimbursed Partner Expense (UPE)
2 Guaranteed Payments
(4,500)
18,000
From Schedule K-1, Form 1065
3 Capital Contributed During the Year
From Schedule K-1 (Form 1065) line L
4
Withdrawals & Distributions
8,400
From Schedule K-1 (Form 1065) line L or 19A
5
6
Net Cash Flow from Business
21,900
Net Cash Flow from all Partnerships
0
0
0
0
21,900
For S-Corporations
S-Corp 1
Name
7
Dividends or Cash Distributions
S-Corp 2
S-Corp 3
S-Corp 4
S-Corp 5
TINY CORP
3,000
From Schedule K-1 (Form 1120S) line 16d, or from check stubs, G/L history of payments, or a
history of deposits. Cash Distributions will not always be included. Only include it if you can
determine the borrower received it in "cash".
8
9
Net Cash Flow from all S-Corporations
3,000
Total Adjustments from Partnerships and S-Corporations
Carries to Comparison Worksheet
$
24,900
76
SCHEDULE E, PAGE 2
PARTNERSHIPS
Partnerships: GET the K-1!
IGNORE the income or loss on Schedule E, Page 2.
It is useless information
INSTEAD: Go to the K-1,
Line L (Line N before 2007)
Subtract ……………. Contributions
Add …………..………Withdrawals and Distributions
Line 4
Add……………………Guaranteed Payments
Watch for Unreimbursed Partnership Expenses and
77
subtract them
SCHEDULE E, PAGE 2
S Corps
IGNORE the income or loss on Schedule E, Page 2.
It is useless information
INSTEAD: Go to the K-1, Line 16D
Add the Dividends or Distributions from line 16D.
If line 16D is blank but the borrower says he/she took
money out of the S Corp:
You could verify the amount received from:
- G/L history of payments to owners
- Check stubs
- History of deposits
78
Lenders Tax Analyzer Comparison Worksheet - 2011 Tax Return
Borrower's Name:
Note: Please complete only items with white boxes. All
other cells are populated with information from other
sheets.
1
ORIGINAL
TAX
RETURN
Wages
In order to complete a Lenders Tax Analyzer report, you will
need:
• Form 1040
• If borrower has Partnership Income: a Schedule K-1 for each
partnership
• If borrower has S-Corp Income: a Schedule K-1 or a history o
distributions the borrower took from the S-Corp. The
distributions paid to S-Corp shareholders are not reliably
reported on K-1s
ADJUSTED
CASH
FLOW
45,000
45,000
1
Form 1040, line 7
2
3
Wage Update (Be sure to update Wages using most recent info)
Obtain from borrower, not from tax return
Taxable Interest
2
7,900
6,100
3
2,100
4
565
5
Form 1040, line 8a
4
Tax-exempt Interest
Moving Around the Screen:
• The ENTER key will move to the next appropriate space.
• Use the TAB key to move one space to the right.
• Use the Arrow keys to move in the direction of the Arrow.
Form 1040, line 8b
5
Ordinary Dividends
4,169
Form 1040, line 9a
6
Taxable Refunds
335
6
Form 1040, line 10
7
Alimony Received
1,450
1,450
7
Form 1040, line 11
8
Child Support
8
Obtain from borrower, not from tax return
9
10
Other Divorce Income (Separate maintenance, division of assets, etc)
Obtain from borrower, not from tax return
Business Income Schedule C
9
(1,644)
2,804
10
15,679
10,266
11
0
12
2,600
13
Form 1040, line 12
11
Capital gain or (Loss) Schedule D
Form 1040, line 13
12
Other Gains Form 4797
Form 1040, line 14
13
IRA Distributions
Form 1040, line 15
14
From line 15a
From line 16b
From line 16a
Pensions and Annuities
Form 1040, line 16
15
1,600
From line 15b
Rental / Royalty Income
14
31,717
23,638
15
24,900
16
Form 1040, line 17
16
Partnership / S-Corporation Income
From Schedule E, Page 2
17
Farm Income or (Loss) Schedule F
(815)
(20)
17
Form 1040, line 18
18
Unemployment Compensation
18
Form 1040, line 19
19
Social Security Benefits
Form 1040, line 20
20
Other Income
2,400
From line 20b
5,400
19
From line 20a
(1,800)
0
20
Form 1040, line 21
21
Unreimbursed Employee Business Expense
22
Annual Gross Cash Flow
23 Monthly Gross Cash Flow (line 22 divided by 12)
(2,152)
21
105,991
$
122,651
22
8,833
$
10,221
23
-
79
Lenders Tax Analyzer
©
80
80
Thank You!
Tim Harrington, CPA
T.E.A.M. Resources
7049 East Tanque Verde, PMB 136
Tucson, AZ 85715
(800) 788-9542
tharrington@forTeamResources.com
www.forTeamResources.com