Tax Return Reivew - Partnership Income Form 1065 with K1 · Tax Return Reivew - Partnership Income Form 1065 with K1 Author: Genworth Mortgage Insurance Subject: Use this presentation

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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


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



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


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

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

Fannie Mae’s 1084

Partnership Form 1065 with K1‏9


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


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


Form 1040Review for:

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


Schedule 1


Let’s look at the E…

Schedule E to Validate Ownership


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

Schedule E to Validate Ownership


This indicates there is a 1065 K1

1065 K-1


Amy is 66.67% owner

19

1065 Partnership

Line 22 Ordinary Income/Loss $_________

K-1%


Schedule E page 2

Part II1040

Schedule 1

Line 5 Net Income/Loss Sch.E

$_________Taxed at a personal rate


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


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


K-1%


Schedule E page 2

Part II1040

Schedule 1




Partnership K-1

Partnership Form 1065 with K1‏23 23

24

1065 Partnership


K-1%


Schedule E page 2

Part II1040

Schedule 1




Review Schedule E


26

1065 Partnership


K-1%


Schedule E page 2

Part II1040

Schedule 1




Income Analysis Form 1084, Section 7


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


IF

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


Access your Cash Flow Quick Reference Guide Form - page two


30SEB 1084 Part II - Business Tax Returns

Analyzing K1’s & Business 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


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


Liquidity

35

Generally Accepted Accounting Principles



Liquidity - Current Ratio


Balance Sheet


(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


Liquidity


Access your Cash Flow Quick Reference Guide Form - page two



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

Partnership K-1


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

Partnership K1


Fannie Mae Selling Guide


Rental Income - Partnership or S Corp


Fannie Mae Form 1039


Partnership K-1


Partnership K-1


Partnership K-1


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?












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










% of Ownership


1065 Summary

Partnership Form 1065 with K1 60

Schedule E Review


Schedule E Review


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

UPE


UPE- Do You Subtract These Expenses?


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

UPE- Do You Subtract These Expenses?


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?


Genworth Underwriting Guidelines

Genworth Rate Express®

LOS Connections



71

Additional MI Site Information

ActionCenter®: 800 444.5664

Your Local Genworth Regional Underwriter

Your Genworth Sales Representative

Your Genworth Resources

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