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Bankers TOP 10 take-aways from tax return analysis training

I just wrapped up a two-day in person training for Lenders on Tax Return Analysis in E. Lansing, Michigan. Thanks to Greenstone Farm Credit Services for hosting!

As my team summarized the evaluations from 22 lenders representing four financial institutions, I remembered something. I had asked them to write, on the back of the evaluation, the top three things they learned from the training that will help them make good loan decisions, spot red flags or better understand their borrower’s business. It is an interesting list! With hats off to David Letterman, here is their list from tenth up to first.

As you read them, rate yourself. Do you know what to do with each?

Banker’s Top Ten Take-Aways

Number Ten Take-away:

Understand Carryovers

  • What is a carryover?
  • Where do you find them?
  • Why do you get to ignore them?

The ninth lesson learned about tax return analysis:

How (and when) to Dig Deeper

  • When might you need to dig deeper?
  • If you have to dig deeper, isn’t it a bad loan in the first place?
  • Where to look?

Eighth on the list:

Don’t forget the non-deducted meals and entertainment

  • Where to find it?
  • Why to include it in expenses?
  • What other non-deducted expenses or losses am I missing?

Seventh Take-Away:

Types of Adjustments (Linda’s Six Ns)

  • What are the necessary adjustments to get from taxable income to historical cashflow?
  • What about from historical cashflow to recurring cashflow available to pay debt?
  • Where do we find them?

The Sixth Lesson Learned:

Capital Gains

  • Do you use proceeds or gain?
  • Is it ever recurring?
  • What documentation do you need?
  • Can you count on asset conversion?
  • When do capital losses camouflage real cashflow?

Fifth Tax Return Analysis Tip:

Follow-through to the attached schedules

  • What schedules besides the front page do you need to review?
  • How do you make sure you have a complete return?
  • What adjustments do you find on each of the schedules?

Top Four to go:

How do Pass-Through Entities work and what numbers are the ‘real’ numbers?

  • What is a pass-through entity?
  • Do I ignore every pass-through entry in a 1040?
  • What do I use instead?
  • What does passive and non-passive mean on 1040 Schedule E, Page Two? And should I care?
  • How do I untangle the web?

The third most common benefit of learning more about cashflow analysis of tax returns:

The difference between the type of entities

  • Which forms does each entity file?
  • Why is the word ‘limited’ in the names of so many types of entities?
  • What difference does it make in how much an owner takes home?
  • What difference does type of entity make in risk mitigation?

Second (and I was surprised it was not first):

Clear up the K-1 Confusion!

  • How does it relate to the entity and the owner return?
  • Which numbers represent actual cashflow?
  • How can I tell how much the owner contributed to the entity?
  • When does the actual cashflow not matter?

And the number one benefit listed by bankers, credit analysts and loan officers after completing two days of tax return analysis training?

An approach (Linda’s roadmap) to working through a tax return.

  • How do you keep track of what you have finished and what you have not done yet?
  • What is the easiest way to be sure the return has all the required forms and schedules?
  • How do you find the other entities owned (partially or wholly) by the entity you are lending to?
  • How do you make sure you spot everything that matters when your worksheet is ‘abbreviated’?

How did you do?

If you are looking for answers (and just a bit irritated I did not give you all the answers), you have options.

  1. My website is a free resource for lenders, credit analysts and underwriters. Use the site-wide search at the bottom of each page. If anyone has ever asked about it, and I have answered it, your question and my answer are archived on this site.
  2. Ask a question yourself. Use the ‘Contact Us‘ page to do it. I promise to answer.
  3. Sign up for ‘Ask Linda: Lender’s Q&A’. You’ll get the answer to a question asked by a lender like you, each month. And each issue includes the upcoming in person and virtual training for you and your team.
  4. Use our online, self-study modules. With 35 titles covering tax return and financial statement analysis, each with handouts to complete and keep, you can learn in bite-size chunks. Find them at www.LendersOnlineTraining.com.
  5. Attend a virtual training. The four-week classes start about every six weeks. Find what you need at www.LindaKeithCPA.com/web-based class.
  6. Attend an in person training. You can bring me in-house or do what Greenstone did, host a local/regional training at your location. Washington Trust Bank is doing the same next month. Find out where I am training next. And if nothing is schedule close enough, give us a call at 360-455-1569 to schedule the training you need.
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 www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.