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Lucky 13: Additions to cashflow you may be missing

This would be a bad time to miss an add to taxable income. Your borrower’s need all the help they can get to qualify for your loan.

Some in this list are personal and some are business. Let’s face it, if you are lending to a business-owner you need to understand business cashflow. And if you are lending to a business, you need to understand the owner/guarantor’s personal cashflow.

Add to cashflow…

Before you add anything to cashflow consider:

  • whether you are doing historical or recurring cashflow (don’t add nonrecurring income)
  • how your guidelines handle these items
  • whether it is needed to qualify the borrower (save time and hassle by not pursuing adjustments that will not make a difference)

That said…here are some possibilities!

  1. Child support
    •    WHAT: Support from a non-custodial parent
    •    WHERE: Not listed on the tax return. Get it from their application
    •    DOCUMENTATION: Divorce decree to prove it should continue and perhaps bank statements to show the borrower has been receiving it
  2. Military pay in Iraq or Afghanistan
    •    WHAT: Payment for services in a qualified combat zone
    •    WHERE: Not listed on the tax return. Get it from their application
    •    DOCUMENTATION: The W-2 will indicate the amount excluded.
  3. Minister Housing Allowance
    •    WHAT: An amount paid by a religious organization as housing allowance for an ordained minister, rabbi or
    •    WHERE and DOCUMENTATION: Not listed on the tax return. See W-2, Box 14, Other or letter from religious institution.
  4. Foster Care payments
    •    WHAT: Payment from a state for care of children who are wards of the state
    •    WHERE: Not listed on the tax return.
    •    DOCUMENTATION: None is required by the IRS. Request documentation from the paying agency.
  5. Tax-exempt interest
    •    WHAT: Interest on municipal bonds
    •    WHERE: 1040 Line 8a, 1120 (Corporation) Sch K Line 9, 1120S (S Corporation) Sch K Line 16a, 1065 Sch K Line 18a
    •    DOCUMENTATION: None needed. They would not have reported it on the tax return if they did not receive it. As for deciding if it is continuing, consider interest income as a whole (taxable and nontaxed). If significant and needed to qualify, request documentation of underlying assets.
  6. Disability income
    •    WHAT: Income received from the Veterans Affairs for disability or from a disability policy the taxpayer paid for personally is not taxable as income. (If the employer paid for the plan, the disability income is taxed on the wages line of the return.)
    •    WHERE: If not taxable, it will not be reported on the tax return at all.
    •    DOCUMENTATION: Statement from the payer of the disability income.
  7. Untaxed wages
    •    WHAT: Taxable wages reported on Line 7 of the 1040 are less than gross wages to the extent that the taxpayer deferred compensation into a 401(k) or similar plan, received adoption benefits, or made certain contributions to Archer MSA (medical savings accounts)
    •    WHERE: These untaxed wages will not be reported on the 1040. You may discover them due to a discrepancy between what the borrower lists on their application and the amount listed on Line 7 of the 1040. You also may note a difference between the Officer Compensation on the 1120 or 1120S and the amount listed for the same period on the 1040.
    •    DOCUMENTATION: Either Line 5 on the W-2 (Medicare wages), the Gross Wages on a year-end pay stub, or the Compensation for that Officer on the 1120 can be used instead of the amount on 1040 Line 7.
  8. Proceeds from sale of personal residence
    •    WHAT: Generally the taxpayer can exclude proceeds on the sale of a personal residence lived in two of the most recent five years. (Some gain exceptions apply).
    •    WHERE: You will not see this on the tax return.
    •    DOCUMENTATION: Since you are unlikely to treat this as recurring cashflow, you probably do not need documentation. This comes into play, however, when you suspect fraud (cannot figure out how the person supports this lifestyle or came up with the money to support a struggling business on the income reported) and the ‘missing’ income turns out to be legitimately unreported since it was from sale of a personal residence.
  9. Portion of unemployment compensation. Up to $2,400 on 2009 returns
    •    WHAT: As part of the response to the recession, a portion of unemployment compensation was not taxed.
    •    WHERE: 1040 Line 19 shows the taxable amount. The borrower does not have to report the first $2,400. HOWEVER, if you do not think the unemployment compensation is recurring, you should not add it.
    •    DOCUMENTATION: The taxpayer received a 1099-G from the government showing the total amount received.
  10. Foreign source income in some cases, if you live outside the U.S.
    •    WHAT: U.S.Citizens are generally allowed an exclusion of up to $91,400 for income earned outside the United States if they also live outside of the United States.
    •    WHERE: The Foreign Earned Income Exclusion is reported as a reduction to AGI on Form 1040, Line 21 (Other). The supporting IRS schedule is Form 2555.
    •    DOCUMENTATION: Form 2555 provides the information you need. 
  11. Portion of Social Security/IRA/Pensions
    •    WHAT: Depending on whether the contributions to IRAs and Pensions were before- or after-tax, and what type of IRA the borrower has, a portion of distributions may be untaxed. With social security, there is always an untaxed amount ranging from the full distributions to 15% of the distributions.
    •    WHERE: Form 1040 Lines 15, 16 and 20
    •    DOCUMENTATION: None needed. The amounts reported on Line 15a, 16a and 20a are the full amounts. BEFORE YOU ADD IT: Consider if the distributions are continuing.
  12. Portion of Notes/Contract payments received
    •    WHAT: If your borrower is receiving payments on a note or contract receivable, they are taxed on the interest income and in some cases, part of the principal received. A note or contract receivable results from a sale (a rental or a business for example) or a loan to an individual or business.
    •    WHERE: You will see the interest income on 1040 Schedule B and may see the principal received on Form 6252 Installment Sale Income.
    •    DOCUMENTATION: You need the copy of the contract to determine the full amount received and, as importantly, how much longer the payments will continue. SHORTCUT: If you have the Form 6252, Line 21 shows the principal received that year. You can add the interest income from Schedule B to the principal received from Form 6252 to determine what the borrower actually received that year. It does not tell you, however, how much longer the payments will continue or if the borrower was receiving payments as agreed.
  13. Stolen Property
    •    WHAT: You have to ask? The IRS Publication 17 says: ‘If you steal property, you must
      report its fair market value in your income in the year you steal it
      unless in that year you return it to its rightful owner!’
    •    WHERE: Form 1040, Line 21 (or the ‘other income’ line of business returns)
    •    DOCUMENTATION: Hmmmm. Not sure about this one! I guess you should look at several year’s returns to see if it is recurring!

What else?

  • What else are you finding to add or add back?
  • What else are you wondering if you can add or add back?
About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.