December 3, 2024 • 23 mins
Understanding how to analyze self-employed borrower income is a key skill for every loan officer, especially when it comes to LLCs. In this episode of Loan Officer Training, we dive into the specifics of evaluating income for borrowers operating under a Limited Liability Company structure.
Join us as we unpack essential documents, explore common challenges, and share proven strategies to confidently assess eligibility. Whether you’re a seasoned professional or just starting out, this episode will equip you with the tools to navigate the complexities of LLC borrower income and help you close more deals.
Stay tuned for practical tips, expert insights, and real-world examples to sharpen your skills and take your loan officer expertise to the next level!
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Restream recording Dec 03, 2 (00:00):
So what exactly is a limited
(00:04):
liability company?
LLC, right?
That's what LLC stands for.
Now, this is very important tonote because this is what you
need to know.
So, you know, what documentationto ask when analyzing the
income, that's the main purposeof this training.
We, we're not specificallybreaking down, analyzing the
(00:27):
numbers, but we are providingthe structure so that, you know,
we're not.
What is the documentation thatyou need to look for, to review,
to analyze so that your incomeanalysis is correct?
Because, um, one of the mistakesthat we find, uh, uh, that MLOs,
(00:48):
uh, do when they're calculatingself employed borrower income is
that they may not ask for thebusiness tax returns or the
partnership tax returns.
They're simply going to use thepersonal tax returns.
And if you do that, um,unfortunately the borrower could
(01:10):
be Leaving a lot of money on thetable, and that would be you
leaving their money on the tablebecause you would not be
recapturing certain expenses,for example, that could be added
back that would only be on thebusiness or corporate tax
return.
None of that is going to benoted on the personal tax
(01:33):
return, because the personal taxreturn is going to talk about a
net amount.
So an LLC, aka limited liabilitycompany, is a hybrid business
structure that combines thelimited liability of a
(01:54):
corporation with the passthrough taxation of a
partnership or soleproprietorship.
Um, most LLCs out there areoperated.
As partnerships, but we do haveLLCs that actually file.
Escort 1120s tax returns becausethey're an LLC, right?
(02:19):
The, the entity, if you want tocall it instead of the
individual that owns the Escortis an LLC, and then they file
the 1120s.
And then, you know, I'll gothrough that income stream in a
minute, uh, but that's how that,uh, scenario works.
(02:42):
So the, uh, and hold on, let me,uh, do something a minute here
so that I can, uh, correcteverybody's view a second.
Give me a minute here.
Sorry.
Give me one second.
I'm going to better your viewbecause I actually have this
(03:16):
part.
On another slide, so everyonecan better see what we're doing
here.
All right, now I think you guyssee a little bit better what's
going on.
I got that part that I deletedactually on the slide on page 3.
(03:38):
So, The uh, okay, so let's getback to business.
The LLC is a hybrid businessstructure.
Okay, I mentioned this alreadythat combines the limited
liability of a corporation withpass through taxation of a
partnership or soleproprietorship.
So I already mentioned it couldbe being operated as a
partnership or it could be beingoperated as an escort.
(04:01):
Uh, LLCs are operated accordingto an operating agreement,
right?
The operating agreement, that'sbasically their rules and
regulations.
LLC owners called members,right, the members of an LLC are
the owners, are not usuallypersonally liable.
(04:22):
For the debts and obligations ofthe business, right?
So that's similar to acorporation as opposed to a
partnership where in apartnership, the business owners
are 100 percent liable for theexpenses and obligations of the
business.
Uh, and now an O.
(04:43):
C.
has the benefit of being a passthrough entity.
This is benefit, but it's also anegative where taxes are paid by
the partners personally throughtheir 10 40 tax return, right?
As opposed to, um, if it's a Ccorp, right, but an S corp.
(05:05):
Is also a pass through entitywhere taxes are paid by the
partners personally throughtheir 1040.
What's limited is the liabilityof the expenses and obligations
other than taxes.
Now, um, I always like to coverthis part of what exactly is
(05:26):
meant by self employed.
Um, when we're analyzingborrowers, now this is
applicable for an LLC.
This is applicable for an S Corppartnership, sole
proprietorship.
This is not applicable for a CCorp, right?
A C Corp is an actual entitythat exists on its own, but for
(05:50):
all of the, uh, businessstructures, other than a C Corp,
an individual is considered selfemployed.
When they have a 25 percent orgreater ownership interest in a
business.
So 24.
9%, they're not, uh, selfemployed 25.
(06:13):
0 percent and greater.
They are considered selfemployed.
Now, usually we need a two yearhistory of self employment.
to be able to use the selfemployment income.
But as is usually the case,there are exceptions to this two
(06:33):
year rule.
The exceptions are if theborrower is receiving the same
or greater income in a similarfield or position, or if the
borrower is in a similaroccupation In which they had
similar responsibilities numberto the second one.
(06:56):
There's a second bullet point isthe one that we normally use in
the exception.
This bullet point would beapplicable.
For example, a doctor.
Right?
We have loans where the and Ihad to come recently through my
desk.
in review for another MLO, wherethe doctor was previously a W 2
(07:19):
employee, right?
Then they transitioned to 1099employee, they formed their LLC,
and now they're self employed,right?
But they're still a doctor,they're still doing the same
occupation that they had whenthey were W 2 employee.
So we would probably be able touse that income as long as we
(07:44):
have at least 12 months worth ofincome for that income stream.
Now, if you're going non QM, youknow, again, you gotta review
the guidelines.
There's a little bit more, uh,flexibility in the non QM world,
especially If you're choosingthe 1099 program instead of a
(08:05):
full doc program, for example,uh, the, the doctor that we had
had only had, um, I think ninemonths of 1099 income, but they
had plenty of W 2 income and itwas a really solid continuous
stream.
So we were able to get that oneclosed, but no two year history
(08:26):
is required.
Unless your borrower, um, fallsinto one of these categories.
Another one would be, um,electrician who has a license.
For example, maybe they wereworking as a W2 employee.
They still had to have theirlicense to be an electrician.
And now they transition, theyhave their own business, same
license, you know, but nowthey're just doing it on their
(08:48):
own.
We would probably be able toclose that one.
Uh, As a self employed borrower,as long as we met the minimum
number of months, uh, sometimesit lasts for 12 months, like I
mentioned, of, uh, selfemployment just so that they can
properly calculate 12 monthsworth of income.
So, we're talking about income,so, uh, it's really important to
(09:14):
note that the reporting of theincome, will depend on the
business structure of the LLCdue to the hybrid nature of an
LLC.
I mentioned the LLC couldoperate as a partnership or it
could operate as, for example,as an S corporation.
Which are the two most popular?
(09:36):
In common structures for an LLC.
The most common one willprobably be a partnership.
And second will be an S Corp.
What does that mean for you?
Now this is the part where yougotta really open your eyes and
pay attention.
Because this is what's gonnadetermine if you calculate your
income correctly or not.
(09:56):
Right.
Um, because it's now in somecases, uh, if it's a single
member LLC, and they may not,they will not have a 1065
report, which is the partnershiptax return, and they may or may
not have an S corp, in whichcase that single member LLC is
(10:18):
probably just going to reporttheir income on the schedule
seat of the tax return.
And then that will go toSchedule 1, and then that will
go to the front page of the 1040in Line 8, where they report the
self employed income that comesover from Schedule 1.
(10:40):
Uh, that's also a lot lesscommon.
Mostly, you're going to have thefirst option, which is a
partnership.
So when you are interviewingyour borrower, And you see that
they are self employed.
You're going to ask them, uh, doyou have an LLC formed?
Or are you just, uh, you know,you hopefully you'll see you'll
have their 1040.
(11:01):
And if you see a schedule Cthere and you see that's where
the reporting income, you'restill going to want to ask them.
And you're going to look forschedule E to see on page two,
if there's any entries, becauseif they do have a partnership
on, you know, you're going tolook at the 1040 tax return and
you're going to look forschedule E.
Of the 1040 tax return andspecifically, you're going to
(11:24):
look for page 2 of the scheduleE.
If there is a page 2, becausenormally the schedule E has
rental real estate income,right?
That would be on page 1, but ifthey have any royalties that
they're receiving or income thatthey're receiving from a
partnership or corporation, 2.
To the Schedule E.
If you see a page 2, there's anentry there with an entity's tax
(11:49):
ID number, for example, then yougot to investigate further and
you got to see, is that an SCorp?
Is that a C Corp?
Is that a partnership?
What exactly is it?
That's reporting that income inpage two.
And then you're going to have toask the borrower if they did not
provide that document to provideit.
So if it's determined, if, iffrom your, uh, investigation,
(12:13):
there is determined that it's apartnership, then do know that
partnership income is reportedon IRS form 1065, that is the
partnership tax return, and theneach partners share Is reported
on a schedule 1.
So if they're 5050 owner,there'll be 2 K1s issued to each
(12:38):
partner is going to say thatthey're 50 percent owner and
it's going to have the incomethat was distributed to that
partnership on the schedule K1and then that income from the
schedule K1.
Is then reported on the personaltax return, the 1040 of the
borrower via Schedule E, page 2.
(13:00):
And then, uh, that incomereported on Schedule E, page 2,
is reported on the 1040,Schedule 1.
And then finally, the incomereported on Schedule 1 is
reported on page 1 of the 1040,line 8.
So that's, that's the, uh, thepath that the money takes.
(13:23):
To get to the borrower if theyhave a partnership.
And if there is an S corp, thenthe, um, the income.
Um, if you, if it's determinedthat it is an S corp, then
you're gonna request the S corp1120 s tax return.
That's where an S corp filestheir taxes.
Again, each partner share isreported on the K one.
(13:47):
And then that follows the samepath.
It goes to then that K 1 incomeis reported on the 1040 Schedule
E.
Page 2, and then it getsreported on the 1040 Schedule 1,
and then also goes to line 8 onpage 1 of the 1040, which is the
(14:12):
self employed borrower income.
So if you see anything on page1, on page 1, line 8, Of the 10,
of the 1040 tax return, there'ssome, some type of self
employment income going on.
There's an additional incomestream that's not W 2 income.
So this page here, veryimportant, uh, to you making
(14:33):
sure that you have the correctdocumentation to review the
income and are not just lookingat the 1040.
And then last but not least, Ido include this page here
because this is a very importantpage, right?
These are the expenses that maybe added back, uh, or maybe, um,
(15:01):
not considered, right?
So what are we talking about?
Well, we're talking about noncash expenses.
Uh, uh, for example, non cashexpenses.
Now, there's three categorieshere.
Non cash expenses, expenseslimited by the IRS, and
recurring and non recurringincome or loss.
(15:21):
Now this is very important thatyou review these.
Because these do give youoptions to some, like I was
saying, in some cases, recaptureincome.
So non cash expenses can beadded back to income.
The most common example of noncash expenses that can be added
back to income are depreciationon real estate.
(15:45):
Or on personal property, uh,business property, should I
state like a car equipment,furniture, that would be the
channel asset depletion isanother non cash expense, which
would be exhaustion of a naturalresource.
And it specifically has to say,you know, there is a category
specifically for depletion.
When you're reviewing thepartnership return or the S corp
(16:09):
return, there's going to be acategory for depreciation.
Category for depreciation, uh,depletion.
And then you also haveamortization.
Amortization is a one timebusiness startup expense, and it
specifically has to sayamortization.
Now, I think you may be able toget away with including it.
If it says business startupexpense and the, um, accountant
(16:33):
didn't specifically notated asamortization, but they put
business startup expense andthey put an amount.
You could most likely I think anunderwriter will agree with you
on that one.
In that case, it's just a matterof semantics, right?
Another category here, uh, thisis not a good one, right?
These are expenses limited bythe IRS.
(16:54):
This category Is reduced fromthe income and the reason it's
reduced from the income is dueto the fact that it is an
expense that is limited.
In other words, the IRS does notlet you deduct 100 percent of
the expense.
You're only deducting 50 percentof it.
For example, in the case ofmeals, which is the most common
(17:15):
expense.
In the case of meals, uh, theIRS only lets you deduct 50
percent of the amount.
So the other 50 percent that isnot deducted, guess, guess what
happens with that?
It's deducted from the income.
So it reduces the income.
So if you have 3, 500 in mealsincluded there, guess what
(17:38):
happens there?
That goes in, in your incomecalculation worksheet in the
minus column, uh, for expensesthat are deducted.
And that's going to be deductedfrom the income that they
reported.
And the third category here, andthese are not in order of
importance, these are allequally important, are the
(17:58):
recurring versus non recurringincome or loss.
So a recurring item is an itemthat's expected to continue for
at least the next three years.
Right.
So if we have an item, now whatusually happens here is that we
(18:19):
have items listed in the nonrecurring column, like a non, a
non recurring loss or a nonrecurring income, that is a one
time event that cannot beconsidered towards income nor
expenses.
Uh, examples of this would bethe sale of an asset, like let's
(18:41):
say a piece of equipment,expensive equipment.
Originally costs, let's say amillion dollars.
Now they're selling it for ahundred thousand dollars because
they're buying a new, the latestand greatest version of that
equipment.
So now you see in the otherincome column, I don't know,
maybe like two or three of the,uh, of the, uh, return.
(19:06):
And it's going to have a hundredthousand dollars, but guess
what?
You cannot use that incomeunless you can document that it
was not a non recurring income.
income that would entailreaching out to the accountant
and finding out if that's whatwas the nature of that income.
And is that something we canuse?
Because if it is a non recurringone time event, then you have to
(19:29):
deduct it from the income,right?
You have to make sure because Iwant to tell you the underwriter
is going to deduct it from theincome.
So do not overstate your incomebecause you missed that one
there.
Which is a non recurring income.
Now, where we really like to usethis, uh, this, uh, category of
(19:51):
non recurring is in the losses,right?
You get an, a non recurring lossthat you can add back.
So you could have, for example,a business four years ago, I had
a million dollar loss andthrough some IRS tax code, they
allow them.
To write off 50, 000 a year forthe next 20 years of that loss
(20:14):
for whatever, for whateverreason.
Right?
I mean, we're not an accountant,but we can certainly reach out
or have the bar reach out to theaccountant to provide a letter
of explanation as what was thatloss.
So that we can document tounderwriting that that is a non
recurring, also known as a paperloss, that was carried forward.
(20:36):
Or it could have been a casualtyloss, right?
Casualty losses are another nonrecurring loss that you can add
back, right?
That's a one time loss.
They had a 100, 000 loss.
They had a 15, 000 deductible.
That's an expense.
That's a one time loss.
You can probably add that backbecause that's not going to
(20:57):
occur every year.
And likewise, if they got thatpaper loss that they're carrying
forward for the next 20 years,you can add that back.
The important thing is to have aletter of documentation,
preferably from the taxpreparer.
Documenting what it is andpossibly providing additional
documentation to support theletter that they're providing if
(21:19):
it's sort of a convolutedsituation, right?
Which I just mentioned on thelast bullet point, which is so
important, right?
The expense needs to bedocumented as a one time expense
via letter from the accountantif a paper loss or supporting
documentation if a casualty.
loss.
So are there any questions?
(21:40):
This is your opportunity to askyour questions.
I know that you guys havequestions when you come seek out
assistance.
So do you have any questions onincome, on self employed bar
income?
It could be on the items that Ipresented here, or it could be
on any facet.
Of self employed borrower incomeand yes, we do provide copies of
(22:03):
the presentations.
Well, I'm going to give itanother minute here because I
don't see any questions.
I know.
I probably did a great thoroughjob on this.
But, uh, yeah, I alreadyanswered that we can, uh, we.
Upload these, uh, PowerPoints.
(22:25):
To our database.
So, no questions on the subjectmatter.
So, um, I will look forward toseeing everybody tomorrow for
tomorrow's training episode.
Have a great day.
So what exactly is a limited
(00:04):
liability company?
LLC, right?
That's what LLC stands for.
Now, this is very important tonote because this is what you
need to know.
So, you know, what documentationto ask when analyzing the
income, that's the main purposeof this training.
We, we're not specificallybreaking down, analyzing the
(00:27):
numbers, but we are providingthe structure so that, you know,
we're not.
What is the documentation thatyou need to look for, to review,
to analyze so that your incomeanalysis is correct?
Because, um, one of the mistakesthat we find, uh, uh, that MLOs,
(00:48):
uh, do when they're calculatingself employed borrower income is
that they may not ask for thebusiness tax returns or the
partnership tax returns.
They're simply going to use thepersonal tax returns.
And if you do that, um,unfortunately the borrower could
(01:10):
be Leaving a lot of money on thetable, and that would be you
leaving their money on the tablebecause you would not be
recapturing certain expenses,for example, that could be added
back that would only be on thebusiness or corporate tax
return.
None of that is going to benoted on the personal tax
(01:33):
return, because the personal taxreturn is going to talk about a
net amount.
So an LLC, aka limited liabilitycompany, is a hybrid business
structure that combines thelimited liability of a
(01:54):
corporation with the passthrough taxation of a
partnership or soleproprietorship.
Um, most LLCs out there areoperated.
As partnerships, but we do haveLLCs that actually file.
Escort 1120s tax returns becausethey're an LLC, right?
(02:19):
The, the entity, if you want tocall it instead of the
individual that owns the Escortis an LLC, and then they file
the 1120s.
And then, you know, I'll gothrough that income stream in a
minute, uh, but that's how that,uh, scenario works.
(02:42):
So the, uh, and hold on, let me,uh, do something a minute here
so that I can, uh, correcteverybody's view a second.
Give me a minute here.
Sorry.
Give me one second.
I'm going to better your viewbecause I actually have this
(03:16):
part.
On another slide, so everyonecan better see what we're doing
here.
All right, now I think you guyssee a little bit better what's
going on.
I got that part that I deletedactually on the slide on page 3.
(03:38):
So, The uh, okay, so let's getback to business.
The LLC is a hybrid businessstructure.
Okay, I mentioned this alreadythat combines the limited
liability of a corporation withpass through taxation of a
partnership or soleproprietorship.
So I already mentioned it couldbe being operated as a
partnership or it could be beingoperated as an escort.
(04:01):
Uh, LLCs are operated accordingto an operating agreement,
right?
The operating agreement, that'sbasically their rules and
regulations.
LLC owners called members,right, the members of an LLC are
the owners, are not usuallypersonally liable.
(04:22):
For the debts and obligations ofthe business, right?
So that's similar to acorporation as opposed to a
partnership where in apartnership, the business owners
are 100 percent liable for theexpenses and obligations of the
business.
Uh, and now an O.
(04:43):
C.
has the benefit of being a passthrough entity.
This is benefit, but it's also anegative where taxes are paid by
the partners personally throughtheir 10 40 tax return, right?
As opposed to, um, if it's a Ccorp, right, but an S corp.
(05:05):
Is also a pass through entitywhere taxes are paid by the
partners personally throughtheir 1040.
What's limited is the liabilityof the expenses and obligations
other than taxes.
Now, um, I always like to coverthis part of what exactly is
(05:26):
meant by self employed.
Um, when we're analyzingborrowers, now this is
applicable for an LLC.
This is applicable for an S Corppartnership, sole
proprietorship.
This is not applicable for a CCorp, right?
A C Corp is an actual entitythat exists on its own, but for
(05:50):
all of the, uh, businessstructures, other than a C Corp,
an individual is considered selfemployed.
When they have a 25 percent orgreater ownership interest in a
business.
So 24.
9%, they're not, uh, selfemployed 25.
(06:13):
0 percent and greater.
They are considered selfemployed.
Now, usually we need a two yearhistory of self employment.
to be able to use the selfemployment income.
But as is usually the case,there are exceptions to this two
(06:33):
year rule.
The exceptions are if theborrower is receiving the same
or greater income in a similarfield or position, or if the
borrower is in a similaroccupation In which they had
similar responsibilities numberto the second one.
(06:56):
There's a second bullet point isthe one that we normally use in
the exception.
This bullet point would beapplicable.
For example, a doctor.
Right?
We have loans where the and Ihad to come recently through my
desk.
in review for another MLO, wherethe doctor was previously a W 2
(07:19):
employee, right?
Then they transitioned to 1099employee, they formed their LLC,
and now they're self employed,right?
But they're still a doctor,they're still doing the same
occupation that they had whenthey were W 2 employee.
So we would probably be able touse that income as long as we
(07:44):
have at least 12 months worth ofincome for that income stream.
Now, if you're going non QM, youknow, again, you gotta review
the guidelines.
There's a little bit more, uh,flexibility in the non QM world,
especially If you're choosingthe 1099 program instead of a
(08:05):
full doc program, for example,uh, the, the doctor that we had
had only had, um, I think ninemonths of 1099 income, but they
had plenty of W 2 income and itwas a really solid continuous
stream.
So we were able to get that oneclosed, but no two year history
(08:26):
is required.
Unless your borrower, um, fallsinto one of these categories.
Another one would be, um,electrician who has a license.
For example, maybe they wereworking as a W2 employee.
They still had to have theirlicense to be an electrician.
And now they transition, theyhave their own business, same
license, you know, but nowthey're just doing it on their
(08:48):
own.
We would probably be able toclose that one.
Uh, As a self employed borrower,as long as we met the minimum
number of months, uh, sometimesit lasts for 12 months, like I
mentioned, of, uh, selfemployment just so that they can
properly calculate 12 monthsworth of income.
So, we're talking about income,so, uh, it's really important to
(09:14):
note that the reporting of theincome, will depend on the
business structure of the LLCdue to the hybrid nature of an
LLC.
I mentioned the LLC couldoperate as a partnership or it
could operate as, for example,as an S corporation.
Which are the two most popular?
(09:36):
In common structures for an LLC.
The most common one willprobably be a partnership.
And second will be an S Corp.
What does that mean for you?
Now this is the part where yougotta really open your eyes and
pay attention.
Because this is what's gonnadetermine if you calculate your
income correctly or not.
(09:56):
Right.
Um, because it's now in somecases, uh, if it's a single
member LLC, and they may not,they will not have a 1065
report, which is the partnershiptax return, and they may or may
not have an S corp, in whichcase that single member LLC is
(10:18):
probably just going to reporttheir income on the schedule
seat of the tax return.
And then that will go toSchedule 1, and then that will
go to the front page of the 1040in Line 8, where they report the
self employed income that comesover from Schedule 1.
(10:40):
Uh, that's also a lot lesscommon.
Mostly, you're going to have thefirst option, which is a
partnership.
So when you are interviewingyour borrower, And you see that
they are self employed.
You're going to ask them, uh, doyou have an LLC formed?
Or are you just, uh, you know,you hopefully you'll see you'll
have their 1040.
(11:01):
And if you see a schedule Cthere and you see that's where
the reporting income, you'restill going to want to ask them.
And you're going to look forschedule E to see on page two,
if there's any entries, becauseif they do have a partnership
on, you know, you're going tolook at the 1040 tax return and
you're going to look forschedule E.
Of the 1040 tax return andspecifically, you're going to
(11:24):
look for page 2 of the scheduleE.
If there is a page 2, becausenormally the schedule E has
rental real estate income,right?
That would be on page 1, but ifthey have any royalties that
they're receiving or income thatthey're receiving from a
partnership or corporation, 2.
To the Schedule E.
If you see a page 2, there's anentry there with an entity's tax
(11:49):
ID number, for example, then yougot to investigate further and
you got to see, is that an SCorp?
Is that a C Corp?
Is that a partnership?
What exactly is it?
That's reporting that income inpage two.
And then you're going to have toask the borrower if they did not
provide that document to provideit.
So if it's determined, if, iffrom your, uh, investigation,
(12:13):
there is determined that it's apartnership, then do know that
partnership income is reportedon IRS form 1065, that is the
partnership tax return, and theneach partners share Is reported
on a schedule 1.
So if they're 5050 owner,there'll be 2 K1s issued to each
(12:38):
partner is going to say thatthey're 50 percent owner and
it's going to have the incomethat was distributed to that
partnership on the schedule K1and then that income from the
schedule K1.
Is then reported on the personaltax return, the 1040 of the
borrower via Schedule E, page 2.
(13:00):
And then, uh, that incomereported on Schedule E, page 2,
is reported on the 1040,Schedule 1.
And then finally, the incomereported on Schedule 1 is
reported on page 1 of the 1040,line 8.
So that's, that's the, uh, thepath that the money takes.
(13:23):
To get to the borrower if theyhave a partnership.
And if there is an S corp, thenthe, um, the income.
Um, if you, if it's determinedthat it is an S corp, then
you're gonna request the S corp1120 s tax return.
That's where an S corp filestheir taxes.
Again, each partner share isreported on the K one.
(13:47):
And then that follows the samepath.
It goes to then that K 1 incomeis reported on the 1040 Schedule
E.
Page 2, and then it getsreported on the 1040 Schedule 1,
and then also goes to line 8 onpage 1 of the 1040, which is the
(14:12):
self employed borrower income.
So if you see anything on page1, on page 1, line 8, Of the 10,
of the 1040 tax return, there'ssome, some type of self
employment income going on.
There's an additional incomestream that's not W 2 income.
So this page here, veryimportant, uh, to you making
(14:33):
sure that you have the correctdocumentation to review the
income and are not just lookingat the 1040.
And then last but not least, Ido include this page here
because this is a very importantpage, right?
These are the expenses that maybe added back, uh, or maybe, um,
(15:01):
not considered, right?
So what are we talking about?
Well, we're talking about noncash expenses.
Uh, uh, for example, non cashexpenses.
Now, there's three categorieshere.
Non cash expenses, expenseslimited by the IRS, and
recurring and non recurringincome or loss.
(15:21):
Now this is very important thatyou review these.
Because these do give youoptions to some, like I was
saying, in some cases, recaptureincome.
So non cash expenses can beadded back to income.
The most common example of noncash expenses that can be added
back to income are depreciationon real estate.
(15:45):
Or on personal property, uh,business property, should I
state like a car equipment,furniture, that would be the
channel asset depletion isanother non cash expense, which
would be exhaustion of a naturalresource.
And it specifically has to say,you know, there is a category
specifically for depletion.
When you're reviewing thepartnership return or the S corp
(16:09):
return, there's going to be acategory for depreciation.
Category for depreciation, uh,depletion.
And then you also haveamortization.
Amortization is a one timebusiness startup expense, and it
specifically has to sayamortization.
Now, I think you may be able toget away with including it.
If it says business startupexpense and the, um, accountant
(16:33):
didn't specifically notated asamortization, but they put
business startup expense andthey put an amount.
You could most likely I think anunderwriter will agree with you
on that one.
In that case, it's just a matterof semantics, right?
Another category here, uh, thisis not a good one, right?
These are expenses limited bythe IRS.
(16:54):
This category Is reduced fromthe income and the reason it's
reduced from the income is dueto the fact that it is an
expense that is limited.
In other words, the IRS does notlet you deduct 100 percent of
the expense.
You're only deducting 50 percentof it.
For example, in the case ofmeals, which is the most common
(17:15):
expense.
In the case of meals, uh, theIRS only lets you deduct 50
percent of the amount.
So the other 50 percent that isnot deducted, guess, guess what
happens with that?
It's deducted from the income.
So it reduces the income.
So if you have 3, 500 in mealsincluded there, guess what
(17:38):
happens there?
That goes in, in your incomecalculation worksheet in the
minus column, uh, for expensesthat are deducted.
And that's going to be deductedfrom the income that they
reported.
And the third category here, andthese are not in order of
importance, these are allequally important, are the
(17:58):
recurring versus non recurringincome or loss.
So a recurring item is an itemthat's expected to continue for
at least the next three years.
Right.
So if we have an item, now whatusually happens here is that we
(18:19):
have items listed in the nonrecurring column, like a non, a
non recurring loss or a nonrecurring income, that is a one
time event that cannot beconsidered towards income nor
expenses.
Uh, examples of this would bethe sale of an asset, like let's
(18:41):
say a piece of equipment,expensive equipment.
Originally costs, let's say amillion dollars.
Now they're selling it for ahundred thousand dollars because
they're buying a new, the latestand greatest version of that
equipment.
So now you see in the otherincome column, I don't know,
maybe like two or three of the,uh, of the, uh, return.
(19:06):
And it's going to have a hundredthousand dollars, but guess
what?
You cannot use that incomeunless you can document that it
was not a non recurring income.
income that would entailreaching out to the accountant
and finding out if that's whatwas the nature of that income.
And is that something we canuse?
Because if it is a non recurringone time event, then you have to
(19:29):
deduct it from the income,right?
You have to make sure because Iwant to tell you the underwriter
is going to deduct it from theincome.
So do not overstate your incomebecause you missed that one
there.
Which is a non recurring income.
Now, where we really like to usethis, uh, this, uh, category of
(19:51):
non recurring is in the losses,right?
You get an, a non recurring lossthat you can add back.
So you could have, for example,a business four years ago, I had
a million dollar loss andthrough some IRS tax code, they
allow them.
To write off 50, 000 a year forthe next 20 years of that loss
(20:14):
for whatever, for whateverreason.
Right?
I mean, we're not an accountant,but we can certainly reach out
or have the bar reach out to theaccountant to provide a letter
of explanation as what was thatloss.
So that we can document tounderwriting that that is a non
recurring, also known as a paperloss, that was carried forward.
(20:36):
Or it could have been a casualtyloss, right?
Casualty losses are another nonrecurring loss that you can add
back, right?
That's a one time loss.
They had a 100, 000 loss.
They had a 15, 000 deductible.
That's an expense.
That's a one time loss.
You can probably add that backbecause that's not going to
(20:57):
occur every year.
And likewise, if they got thatpaper loss that they're carrying
forward for the next 20 years,you can add that back.
The important thing is to have aletter of documentation,
preferably from the taxpreparer.
Documenting what it is andpossibly providing additional
documentation to support theletter that they're providing if
(21:19):
it's sort of a convolutedsituation, right?
Which I just mentioned on thelast bullet point, which is so
important, right?
The expense needs to bedocumented as a one time expense
via letter from the accountantif a paper loss or supporting
documentation if a casualty.
loss.
So are there any questions?
(21:40):
This is your opportunity to askyour questions.
I know that you guys havequestions when you come seek out
assistance.
So do you have any questions onincome, on self employed bar
income?
It could be on the items that Ipresented here, or it could be
on any facet.
Of self employed borrower incomeand yes, we do provide copies of
(22:03):
the presentations.
Well, I'm going to give itanother minute here because I
don't see any questions.
I know.
I probably did a great thoroughjob on this.
But, uh, yeah, I alreadyanswered that we can, uh, we.
Upload these, uh, PowerPoints.
(22:25):
To our database.
So, no questions on the subjectmatter.
So, um, I will look forward toseeing everybody tomorrow for
tomorrow's training episode.
Have a great day.
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