With the 2018 Tax Cuts and Jobs Act there are important tax law changes and some
of the IRS tax forms are hardly recognizable. Even experienced lenders and
credit analysts will feel like they’re starting over. The good news is that the
basic concepts are the same. Tax returns show taxable income. But borrowers
don’t repay debt with taxable income; they use cash flow. The trick is learning
how to obtain a reliable monthly or annual cash flow from a personal tax return.
Incorrectly estimating cash flow from a tax return can result in bad loan
decisions – or missed opportunities. Once you’ve properly converted taxable
income into cash flow, that information can be used in your credit scoring
model, debt-to-income ratio, or disposable income calculation.
for consumer and commercial lenders, this two-part series will teach you an
easy, reliable method to convert a borrower’s personal tax return (Form 1040)
into a cash flow statement using the free software included with this course.
Part 1 will cover Form 1040, Schedule B (Interest and Dividend Incomes) and
Schedule C (Sole Proprietorship Incomes). (Note: This method does not follow
Fannie, Freddie, or QM rules used in mortgage lending.)
- Making sense of the new six-page Form 1040
- Recurring versus
- Schedule B: Determining cash flow from interest and
- Schedule B: Correcting phantom pass-through interest and
dividend incomes earned from partnerships and S corporations (Schedule E
partnership and S corporation income will be addressed in Part 2)
C: Hidden incomes and a hidden expense in a sole proprietorship
Tim Harrington, CPA, TEAM Resources