Self-Employed Borrower Schedule Analysis Method or SAM. Review of the S Corporation Tax Returns Including K-1 April 2017

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1 Self-Employed Borrower Schedule Analysis Method or SAM Review of the S Corporation Tax Returns Including K-1 April 2017 Genworth Mortgage Insurance Corporation 2017 Genworth Financial, Inc. All rights reserved.

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3 Objective Learn to use SAM Form to calculate supportable income for selfemployed borrowers using K-1s and business tax returns S Corporation income and expenses IRS Form 1120S and associated K-1s Always Refer to your CMG Products and Programs for More information as Guidelines vary We will focus today on generic Fannie Mae policy 3

Fannie Mae Updates SEL 2015-09 Cash Flow Analysis Form updated

Evidence of liquidity if no distributions made from partnerships

4 Fannie Mae Updates SEL Cash Flow Analysis Form updated Sections of Chapter B3-3-2 for Self- Employed Borrowers updated Evidence of liquidity if no distributions made from partnerships or S corps Changes effective for applications dated February 1,

2016 Fannie Mae Updates SEL 2016-05 Updates to Business Income Eliminates requirement to confirm borrower has access to income Guidance for methods lenders may use to determine

5 2016 Fannie Mae Updates SEL Updates to Business Income Eliminates requirement to confirm borrower has access to income Guidance for methods lenders may use to determine adequate business liquidity when liquidity assessment is required Chapter B , 09 and B3-3-2 of the Selling Guide have been updated Effective on or before October 1,

6 Self-Employment Fannie Mae 6

7 Written Analysis of Income-Fannie Mae CMG Uses The SAM Form; Always Have A Written Income Analysis In The Loan File 7

8 What Can Causes Problems.. Common Issues With Self-Employed Borrowers Borrowers did not disclose they own the business Missing the full and complete returns Amended returns were filed and do NOT match loan file returns Declining income trends Borrower relocating but not addressed how business will also relocate Borrowers are using the business assets to close There was no distribution of the income to the partner There is a mortgage, note or bond due and payable in less than 12 months on the balance sheet 8

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10 The Case Study You will be working with John Homeowner who owns: 100% Always Watching Security The business files an 1120S Business Tax Return (IRS Form 1120S) John receives a K-1 John also receives a W-2 wage from the business 10

11 Business Classifications S Corporation Can be owned by one person Managing Shareholder must receive a salary Business income reported on Form 1120S Income reported 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 K-1s are attached to the S Corp tax return (IRS Form 1120S) Advantages Taxed on personal basis S Corp pays no tax on income Disadvantages Limited to 100 shareholders 11

12 1120S Corporation % K-1 Line 21 Ordinary Income/Loss $ Line 1 Ordinary Income/Loss $ Net Income/Loss Schedule E page 2 Part II 1040 Line 17 Net Income Sch.E *Taxed at a personal rate *$ 12

13 S Corps Check for trends or changes Gross receipts Cost of goods sold Gross profit Bottom line Ordinary Income W-2 wages Were these paid to borrower? Page 6 13

14 S Corps Review for W-2 paid from business Is this salary income or self-employed income? Where would we give credit for this income on our SAM form?? Page 1 14

15 1120S Corporation % K-1 Line 21 Ordinary Income/Loss $ Line 1 Ordinary Income/Loss $ Schedule E page 2 Part II 1040 Line 17 Net Income Sch.E *Taxed at a personal rate *$ 15

16 S Corp K-1 Page 4 16

17 Rental Income - Partnership or S Corps No Example 17

18 S Corp K-1 Page 4 Did John get a distribution? 18

19 1120S Corporation % K-1 Line 21 Ordinary Income/Loss $ Line 1 Ordinary Income/Loss $ Schedule E page 2 Part II 1040 Line 17 Net Income Sch.E *Taxed at a personal rate *$ 19

20 Schedule E Partnerships and S Corps Page 3 20

21 1120S Corporation % K-1 Line 21 Ordinary Income/Loss $ Line 1 Ordinary Income/Loss $ Schedule E page 2 Part II 1040 Line 17 Net Income Sch.E *Taxed at a personal rate *$ 21

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23 Remember We Must Confirm Liquidity There was not a distribution so Fannie Mae 2016 Selling Guide B , Analyzing Partnership Returns for a Partnership or LLC (6/28/2016) 23

24 Balance Sheet Page 9 24

25 Solvency and Liquidity Generally Accepted Accounting Principles 25

26 Liquidity-Current Ratio Generally Accepted Accounting Principles 26

27 Balance Sheet Quick Ratio or Acid Test Current Assets : (Cash #1 + Acct Receivable #2 + #4+ #5 +Other Current Assets #6) Current Liabilities: (Acct Pay. #16 + MNB #17 + Other Current Liabilities #18) Current Assets: Current Liabilities: $8, = $8,972 $0 + $0+ $4,286 = $4,286 Page 9 27

28 Liquidity- Generally Accepted Accounting Principles 28

29 S Corp K-1 Let s put numbers on our tool! Page 4 29

30 S Corp K-1 S Corp K-1 review Was there a distribution? Page 4 30

31 S Corp K-1 S Corp K-1 review Was there a distribution? Page 4 31

32 S Corporation IRS Form 1120S Page 6 32

33 S Corporation IRS Form 1120S Page 6 33

34 S Corporation IRS Form 1120S Page 6 34

35 S Corporation IRS Form 1120S Page 6 35

36 S Corporation IRS Form 1120S Page 6 36

37 S Corporation IRS Form 1120S Page 11 37

38 S Corporation IRS Form 1120S Page 6 38

39 S Corporation IRS Form 1120S Page 9 39

40 S Corporation IRS Form 1120S Page 6 40

41 S Corporation IRS Form 1120S Page 10 41

42 S Corporation IRS Form 1120S 42

43 S Corp K-1 How much does John own? Page 3 43

44 S Corporation IRS Form 1120S This Must Be Subtracted From The Qualifying Income Used From This Business 44

45 S Corporation IRS Form 1120S This Must Be Subtracted From The Qualifying Income Used From This Business 45

46 mi.genworth.com 46

47 Quick Reference Guide 47

48 Quick Reference Guide Monthly Webinar Calendars Course Catalog 48

49 Quick Reference Guide 49

50 Genworth Rate Express 50

51 Additional CMG Training 51

52 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. Collateral Underwriter or CU TM, Home Ready and Desktop Underwriter or DU are registered Trademarks of Fannie Mae Home Value Explorer (HVE) is a registered trademark of Freddie Mac Loan Product Advisor SM and Loan Collateral Advisor SM are registered Service Marks of Freddie Mac ActionCenter and Rate Express are registered trademarks of Genworth Mortgage Insurance Simply Underwrite SM is a service mark of Genworth Mortgage Insurance Genworth Mortgage Insurance Offers A Comprehensive Suite Of Training Opportunities To Boost Your Know-How, Benefit Your Bottom Line, And Serve Your Borrowers Better. Visit mi.genworth.com To Learn More. 52

Self-Employed Borrower Schedule Analysis Method or SAM. Review of the Partnership Tax Returns Including K-1 February 2017

Self-Employed Borrower Schedule Analysis Method or SAM Review of the Partnership Tax Returns Including K-1 February 2017 Genworth Mortgage Insurance Corporation 2017 Genworth Financial, Inc. All rights