The Internal Revenue Service has released a draft of the new, simplified, postcard size 1040. And it will replace the 1040, 1040A and 1040-EZ. Here is where lending and credit professionals will find the figures needed to calculate global cash flow.
First, this is a draft and only a draft. Here is the draft copy on the IRS website. (Once it is final this link may disappear, sorry!)
As it turns out, everything that was there is still there, just in different places. Except for what the Tax Cuts and Jobs Act got rid of.
What is gone
- The personal exemption
- Miscellaneous deductions from Schedule A (Formerly deductible if they exceeded 2% of AGI
- The deduction for moving expense
Where is the rest?
Throughout the postcard size 1040 there is reference to 6 additional schedules. If a taxpayer has none of these, the postcard is all it takes.
- Schedule 1: Additional sources of income other than W-2 Wages, Interest, Dividends, IRA/pensions/annuities or Social Security benefits. This is, for the most part, where they put the former 1040 Page One items that they are leaving off of the 2018 post card. (Click to see the draft)
- Schedule 2: Some other forms of taxes like on a child’s unearned income
- Schedule 3: Nonrefundable credits
- Schedule 4: More other taxes like self-employment tax
- Schedule 5: Details on tax payments
- Schedule 6: Appoint a third-party designee.
What about the old letter forms? C, D, E, F
No worries, they are still there. C, D, 4797, E and F will be required to support Schedule 1 in the same way they used to support 1040, Page One.
Forms that are not changing
As of the drafts published the date of this blog post, the drafts of Schedules B, C, D, E and F do not show appreciable changes. You will use them to calculate cashflow available to pay debt as you have in the past. And you will still add back depreciation and other non-cash items, adjust for interest and debt, look for major nonrecurring income and deductions…in other words, no change.
The bottom line for bankers
For borrowers with very simple situations, the postcard may be all that is needed. But if you lend to businesses or business owners, farms or farmers, wealthy borrowers or anyone else with a complex tax situation, there is no simplification. You (or your loan software) will have to find the same information in some different places.
A big difference will be the Qualified Business Income Deduction, now on Line 9 of the postcard. The IRS knows where they are going to put it on the tax form. In my opinion, the dust has not yet completely settled on how it will be calculated and the changes that will ensue as your borrowers adjust to maximize this new deduction. I predict changes in wages vs distributions, choice of legal entity, and bunching of charitable contributions, to name a few. I will write more on these in the run up to 2019.
Speaking of changes…the Credit Risk Readiness Report
A decade after the ‘Great Recession’ challenged credit professionals throughout the world, where are we now? I commissioned the Credit Risk Readiness Study and Survey to discover what bankers across the United States, in community banks and credit unions from less than $500 Million to over $2 Billion in asset size, believe about our readiness for the next major disruption.
Click here to request the study. Do you agree? Disagree? How does your financial institution stack up?