The SFH – 4000.1 and Taxes Continues

Written By: Glenn Michaels, Op-Ed Writer

My previous article explained how HUD (FHA) wanted underwriters to review and to come up with an income trend using the borrower’s personal tax returns. 

There are many borrowers that self-employed and these borrowers use other forms to demonstrate their income trend.

The most common business return for self – employed borrowers are 1120, form 1120S and and form 1065. These three forms are for borrowers that have a business and how they must file depending on the business. Form 1120 is used for a business that has a “C” corporation. Form 1120S is filed when is business a Sub chapter S corporation and form 1065 is used when a business is a partnership.

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Analyzing form 1120, US Corporation Income Tax Return:A Corporation refers to a state chartered business owned by stockholders. To determine the borrower’s percentage of ownership of ownership in the business.

Corporate compensation to the officers, in proportion to the percentage of ownership, is shown in the corporate tax return (IRS Form 1120), and individuals tax returns. If the borrower’s percentage of ownership  does not appear on the tax return, the underwriter must obtain the corporate information from corporation accountant along with evidence that the borrower has the right to any compensation.

The table below income found on form 1120.

     Adjustment Item                                                    Description of Adjustment

Depreciation and Depletion            Add the corporation’s depreciation and depletion back to                                                                   the after tax income.

Fiscal Year vs. Calendar Year           If the corporation operates on a fiscal year that is different                                                                   from the calendar year, an adjustment must be made to                                                                       relate  to the individual tax tax return.

Cash withdrawals                            The borrower’s withdrawal of cash from the corporation may                                                             have to severe negative impact on the corporation’s ability to                                                             continue operating.

Analyzing the IRS Form 1120S – Income tax returns for an “S” Corporation.
An “S” Corporation refers to a small start up business, with gains and losses passed in stockholders in proportion to each stockholder’s percentage of business ownership.

Income for owners of “S” corporation comes from W – 2 wages and tax as at the individual rate. Depreciation and depletion may be added back  based on the percentage of ownership.

The borrower’s income must be reduced proportionately by the total obligations payable by the corporation in less than one year.

Analyzing IRS Form 1065: Return of Partnership Income
A partnership refers to when two or more individuals form a business and share in profits, taxes and in responsibility. The borrower is responsible for his or her share of the net income or loss.

Both general and limited partners report their income the IRS form 1065.

Depreciation and depletion may be added back as income based on their share of the business.

About The Author

Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter ( As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. 

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.