Great question, since Schedule B is a mixed bag. As always, check your own guidelines. Here is my short list:
Add
- Interest from banks, credit unions and S&Ls
- When interest rates come back out of the basement, and if this is significant in amount, consider if the borrower still owns the underlying assets
- Interest and Principal from a Note or Contract Receivable
- See “Interest from an individual or company” in the ‘do not add’ list below for explanation
- Dividends
- If significant, consider if the borrower still owns the subject stock. If not, but has been replaced by other stock that will provide dividends, I’d still add it
Do not add
- Interest from a Schedule K-1
- This is pass-through from an 1120S or a 1065
- If the borrower is a low % owner, you need the K-1 to see what they actually received in distributions
- If the borrower is a high % owner, you need the 1120S or the 1065 to see what the company can afford to pay the owner
- Interest from an individual or a company
- This is the result of a note or contract receivable
- The full amount received is the interest PLUS the principal
- In order to count this, you would need a copy of the contract or note to determine how much longer it is continuing
- If continuing long enough and you need the income to qualify, give the borrower credit for the entire amount received, not just the interest income
- Nominee Interest
- This is interest for which this borrower received a 1099 but it really belongs to someone else
- Example: You are on your Mother’s bank account for her convenience and they listed you first
- You will notice this because there will be a subtraction in the listed interest sources that says something like “Less Nominee Interest”
- Match it up with the same amount listed from a bank or credit union up above and be sure to exclude that interest income
- If using AGI method, no need. The Nominee subtraction will back it out.
- If using the Schedule Analysis Method, just be sure you did not include the subject interest income in the figure you are adding for interest
