Tips for analyzing tax returns and personal financial statements

[1] Tax return 1040

Most lenders require business leaders to provide the latest three-year personal and business returns. Thorough analysis of returns to determine the creditworthiness of the borrower and owner. Here are some tips to be aware of:

• View the top left corner of the return to find the form number and description. For example, Form 1040 US Individual Tax Return.

• Verification year, owner, application status [individual or federated] and signature

• Be sure to include all schedules, including Schedule K-1 [K-1 is not part of the individual declaration form]

• For any entity listed in Schedule E, there must be Schedule K-1

• If business and real estate income is reported, verify revenue by cross-checking with W-2 and business tax returns

• Verify ownership of assets and test the validity of the values

• Check if the source of income matches the asset

• Adjusted Total Revenue [AGI] is not actual income or cash

• Individual tax returns are usually prepared on a cash basis, except for depreciation

• Income from the sale of assets minus depreciation and sales expenses

• Certain types of income are delayed

• Therefore, the reported income must be adjusted to cash to determine the funds available for repayment of principal and interest.

• Income from sole proprietorships or partnerships is not included in cash flows

• Can include some non-cash items, such as certain insurance benefits, personal use of company vehicles and stock options

• There is little correlation between income and cash reported in the Individual Income Tax Return #1040

• Timetable K is a very important part of the puzzle. It records the owner's debt, allocates and repays the debt.

• The credit analyst ignores the taxable portion of the leased property or investment loss shown in Form 8582, but considers the cash flow of the property as shown in Schedule E or K-1.

• Analysts should be interested in the amount of tax owed, not the minimum tax amount

• The interest share paid by the borrower to the partnership and the company should be excluded from the cash flow

• Determine the actual cash obtained from capital gains and whether they occur frequently

• Distinguish between the taxable portion of the IRA allocation and the transition period

[2] Personal Financial Statements [PFS]

This is a summary of personal assets and liabilities and income/expenses, providing information on the income and assets that may be mortgaged. Typically, this statement does not distinguish the owner's assets and liabilities from the business's assets and liabilities.

The ideal personal financial statement should be;

• Send to your bank, preferably in the format of your bank

• If the assets are jointly owned or co-borrowers, the date is signed prior to the loan and signed by the borrower and his or her spouse. The signature confirms that the statement is true and correct; it is made for credit and the borrower will notify the bank borrower of any significant changes in the financial condition.

• Currently, it is best not to exceed 90 days or inconsistent with the loan policy

• Accurate, no arithmetic errors, assets and liabilities must be balanced

• Support assets and liabilities, insurance policies, cash deposits, investments, unused credit lines, loan balances, terms, credits, contingent liabilities, etc.

• Get at least one commercial financial statement and tax return every year

• Review integrity with the borrower; learn about reporting methods and supporting documentation

• Test the marketability of assets, solvency, liquidity, debt/equity, verifiability, and continuity of income and expenses.

• Adjusted to exclude the value of assets that are not valuable to banks, assets that cannot be easily liquidated or jointly owned assets, personal assets, non-market securities, pledge CVLI [cash value life insurance], accounts receivable, holding companies and mortgages assets

• Subject to the verification process of asset ownership, asset value and liabilities. Use tax returns, credit reports, search and release for comparable sales.

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