Tax Return Reivew - Partnership Income Form 1065 with K1 · Tax Return Reivew - Partnership Income...

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Tax Return Review-Partnership Income Form 1065 with K1

April 2020

©2019 Genworth Financial, Inc. All rights reserved.

Customer EducationBrought to you by: Genworth Customer Development and Process Consulting

Objective

Understand the meaning of “Self Employed”Learn to use Fannie Mae’s Form 1084 to calculate supportable income using tax returns. Complete Fannie Mae’s Cash Flow Analysis Form 1084

– 1065 K1 Review (Section 7)– 1065 Review (Section 8)– Solvency/Liquidity Test

Partnership Form 1065 with K1

Partnership Form 1065 with K1

Tax Forms-

You’ll Need Calculators-

3Fannie Mae Cash Flow Analysis Form 1084

Training Tools and Information

Partnership Form 1065 with K1 4

mi.Genworth.com

Training Tools and Information

5Fannie Mae Cash Flow Analysis Form 1084

Fannie Mae Lender Letter 2020-03

6Fannie Mae LL 2020-03 and 2020-04

Effective for applications taken April 14 through May 17,2020 unless noted

– Self-Employment• Lenders must confirm that the borrower’s business is open and operating within 10 business

days of the note date (or after closing but prior to delivery). • LL 2020-03 included examples to confirm the business open and operating (below).

Fannie Mae Lender Letter 2020-03

7Fannie Mae LL 2020-03 and 2020-04

Effective for applications taken April 14 through May 17,2020– Age of Documents

• For most income and asset documents age requirements is reduced from four months to two months or 60 days from the note date. If an asset statement is issued quarterly, lenders must obtain the most recently quarterly statement.

• Employment and income verification received directly from a third-party verification vendor, the information in the vendor’s database cannot be more than 60 days old as of the note date.

• No change to age of documentation requirements for Military income using and LES, Social Security, retirement income, long-term disability, MCC, public assistance, foster care or royalty payments.

• Due to the federal income tax filing extension grated through July 15,2020, eliminating the following documentation requirements.

– A copy of the IRS Form 4868 (Application for Automatic Extension of Time to File US Individual Tax Return)– IRS Form 4506-T (Request for Transcript of Tax Return) transcript confirming “No Transcript Available” for the 2019

tax year

Self-Employment Fannie Mae

8Fannie Mae Cash Flow Analysis Form 1084

https://www.fanniemae.com/content/guide/selling/b3/3.2/01.html

Fannie Mae’s 1084

Partnership Form 1065 with K1‏9

Partnership Form 1065 with K1

The Case Study…• Amy is a Designer

• She is a 66.67% member of an LLC

• Her reported taxable Income is a small amount of interest and a K1 from Street Art Design Company, LLC

Partnership Form 1065 with K1

The 1040:Review for‏

– Identifiers• Name• Address• Social Security Number

– All pages and schedules– Any Red Flags– Date

• Most recent– Signatures (back on page 2)

Access Your Quick Reference Guide 1084 Form and the Case Study

Calculator and Quick Reference Guide

12Partnership Form 1065 with K1

Form 1040Review for:

– Wages are now reported online 1

13Partnership Form 1065 with K1

Form 1040Review for:

– Review Line 7a• Is there a Schedule 1?

14Partnership Form 1065 with K1

Schedule 1

15Partnership Form 1065 with K1

Let’s look at the E…

Schedule E to Validate Ownership

16Partnership Form 1065 with K1

Please Note - There Is No Page 1 Of Schedule E In This Example

Schedule E to Validate Ownership

17Partnership Form 1065 with K1

This indicates there is a 1065 K1

1065 K-1

18Partnership Form 1065 with K1

Amy is 66.67% owner

19

1065 Partnership

Line 22 Ordinary Income/Loss $_________

K-1%

Line 1 Ordinary Income/Loss $_________

Schedule E page 2

Part II1040

Schedule 1

Line 5 Net Income/Loss Sch.E

$_________Taxed at a personal rate

Partnership Form 1065 with K1

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

Partnership Form 1065 with K1‏20

Check for trends or changes– Gross receipts – Cost of Goods Sold– Gross Profit – Bottom line “Ordinary Income”

Note:– Guaranteed Payments can be

found on Line 10– This is compensation paid to the

owners and has nothing to do with distributions

Partnership 1065

Partnership Form 1065 with K1‏ 21

22

1065 Partnership

Line 22 Ordinary Income/Loss $_________

K-1%

Line 1 Ordinary Income/Loss $_________

Schedule E page 2

Part II1040

Schedule 1

Line 5 Net Income/Loss Sch.E

$_________Taxed at a personal rate

Partnership Form 1065 with K1

Partnership K-1

Partnership Form 1065 with K1‏23 23

24

1065 Partnership

Line 22 Ordinary Income/Loss $_________

K-1%

Line 1 Ordinary Income/Loss $_________

Schedule E page 2

Part II1040

Schedule 1

Line 5 Net Income/Loss Sch.E

$_________Taxed at a personal rate

Partnership Form 1065 with K1

Review Schedule E

Partnership Form 1065 with K1‏25

26

1065 Partnership

Line 22 Ordinary Income/Loss $_________

K-1%

Line 1 Ordinary Income/Loss $_________

Schedule E page 2

Part II1040

Schedule 1

Line 5 Net Income/Loss Sch.E

$_________Taxed at a personal rate

Partnership Form 1065 with K1

Income Analysis Form 1084, Section 7

Partnership Form 1065 with K1

Review Line 5 to determine if a Schedule E has been filed. This does NOT automatically prove the borrower is Self Employed. Sch. E may disclose K1’s from Partnerships, LLC’s, S-Corp’s and CMO’s… But it may be reported as Rental Income.

Income Analysis Form 1084 - Section 7

Partnership Form 1065 with K1

IF

As a Lender, you must determine the Investors Guidelines and use prudent underwriting analysis. We believe this method to be a best practice.

29Partnership Form 1065 with K1

Access your Cash Flow Quick Reference Guide Form - page two

Calculator and Quick Reference Guide

30SEB 1084 Part II - Business Tax Returns

Analyzing K1’s & Business Returns

31SEB 1084 Part II - Business Tax Returns

Fannie Mae 2020 Selling Guide B3-3.3-07, Income or Loss Reported on IRS Form 1065 or 1120S, Schedule K1 (06/28/2016)

Liquidity

32SEB 1084 Part II - Business Tax Returns

Fannie Mae 2020 Selling Guide B3-3.3-07, Income or Loss Reported on IRS Form 1065 or 1120S, Schedule K1 (06/28/2016)

Partnership K-1

- SEB 1084 Part II‏33 Business Tax Returns 33

Balance Sheet

34Partnership Form 1065 with K1

Liquidity

35

Generally Accepted Accounting Principles

Partnership Form 1065 with K1

Generally Accepted Accounting Principles

Liquidity - Current Ratio

36Partnership Form 1065 with K1

Balance Sheet

37Partnership Form 1065 with K1

(Cash #1 + Acct Receivable #2 + #4+ #5 +Other Current Assets #6)(Acct Pay. #15 + MNB #16 + Other Current Liabilities #17)

Quick Ratio or Acid Test

Current Assets:Current Liabilities:

Current Assets:

Current Liabilities:

$765 + 0 + 0 +0+0 = $765

$0 + $0+ $3,800 = $3,800

Generally Accepted Accounting Principles

Liquidity

38Partnership Form 1065 with K1

Access your Cash Flow Quick Reference Guide Form - page two

Calculator and Quick Reference Guide

39Partnership Form 1065 with K1

Note - The Requirement To Evidence Access To Income Has Since Been Removed By Fannie Mae

Partnership K-1

Partnership Form 1065 with K1‏40 40

Can We Use Ordinary Income/Rental Income From K-1? Was There A Distribution? Was Liquidity Verified?

Partnership K1

41Partnership Form 1065 with K1

Fannie Mae Selling Guide

42SEB 1084 Part II - Business Tax Returns

Rental Income - Partnership or S Corp

43Partnership Form 1065 with K1

Fannie Mae Form 1039

45Partnership Form 1065 with K1

Partnership K-1

46Partnership Form 1065 with K1

Partnership K-1

Partnership Form 1065 with K1‏47 47

Partnership K-1

48Partnership Form 1065 with K1

Before you give credit for the Guaranteed Payments, does this business appear to be capable of paying it in the future?

Do you have a two-year history?

Income Analysis Form 1084 - Section 8

49Partnership Form 1065 with K1

Income Analysis Form 1084 - Section 8

Partnership Form 1065 with K1‏ 50

Income Analysis Form 1084 - Section 8

Partnership Form 1065 with K1‏ 51

Income Analysis Form 1084 - Section 8

Partnership Form 1065 with K1‏ 52

Income Analysis Form 1084 - Section 8

Partnership Form 1065 with K1‏ 53

Income Analysis Form 1084 - Section 8

The statement must be reviewed to determine if “other deductions” includes amortization and/or casualty losses. None have been identified in this return.

Partnership Form 1065 with K1‏ 54

Income Analysis Form 1084 - Section 8

55Partnership Form 1065 with K1

Income Analysis Form 1084 - Section 8

Partnership Form 1065 with K1‏ 56

Income Analysis Form 1084 - Section 8

Partnership Form 1065 with K1‏ 57

Income Analysis Form 1084 - Section 8

Partnership Form 1065 with K1‏ 58

% of Ownership

Partnership Form 1065 with K1‏ 59

1065 Summary

Partnership Form 1065 with K1 60

Schedule E Review

61Partnership Form 1065 with K1

Schedule E Review

62Partnership Form 1065 with K1

This indicates there an additional filing- UPE and it’s associated with the Street Art Design Company, LLC

UPE

63Partnership Form 1065 with K1

UPE- Do You Subtract These Expenses?

64Partnership Form 1065 with K1

Do you have to subtract the $19,365 in expenses?

UPE- Do You Subtract These Expenses?

65Partnership Form 1065 with K1

Do you have to subtract the $19,365 in expenses?

$8,764 of the $19,365 is depreciation.

Do you have to subtract the net expense of $10,601?

Do You Need Two Years?

66Partnership Form 1065 with K1

Genworth Underwriting Guidelines

Genworth Rate Express®

LOS Connections

Training Tools and Information

Training Tools and Information

71

Additional MI Site Information

ActionCenter®: 800 444.5664

Your Local Genworth Regional Underwriter

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Your Genworth Resources

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