FHA Self-Employment Income Calculation Worksheet Job Aid

[Pages:12]FHA Self-Employment Income Calculation Worksheet Job Aid

Note: Content that was added/updated on the last revision date is shown in blue font.

This job aid provides detailed instructions for completing the FHA Self-Employment Income Calculation Worksheet.

The FHA Self-Employment Income Calculation Worksheet, which is located at wholesale. under Forms > FHA, is a tool to be used for FHA loans when any borrower is self-employed.

? The worksheet is to be used for evaluation of only one self-employment business per borrower. ? A new worksheet will need to be used for additional borrowers and self-employment, even if there are multiple borrowers

who share ownership in a business. Disclaimer: Throughout the worksheet there may be references to line number or locations relative to tax returns. These references are subject to change according to updates made by the IRS each year. Always rely mostly on the description of the source of income to locate the correct information on the tax returns.

Loan Information

Borrower's Name Loan Number Business Name Underwriter

Input the name of the borrower for whom the worksheet is being completed.

Input the loan number for which the worksheet is being completed. Input the name of the business for which the worksheet is being completed. If the borrower operates the business under their personal name (typically a Schedule C), there is no need to duplicate the borrower's name in this field For underwriting, input the name of the underwriter completing the worksheet.

IRS Form 1040 Individual Income Tax Return This section will collect information that can be procured from the borrower's 1040 tax returns.

At the top of this section are two Year fields. In the first column, enter the first year that will be evaluated. Once entered, the second column will populate with the previous year. Subsequently, all other Year fields throughout the worksheet will populate accordingly.

1. W-2 Income from Self-Employment

This section is to be completed with data from the W-2, which was issued to the borrower from the business being evaluated. This does not include W-2 income from any other employment or any other borrower. This section should not be completed if the worksheet is also being used for any other type of self-employment (ex. Schedule C).

a. W-2 Income from SelfEmployment

Original Issue Date: 01/21/2020 Last Revision Date: 07/20/2023 Last Reviewed Date:07/20/2023

Input the gross earnings directly from the borrower's W-2 issued by the business being evaluated. (Form 1040 > Line 1)

FHA Self-Employment Income Calculation Worksheet Job Aid For Wholesale Customers Only

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b. Subtotal

The W-2 income will be reiterated as a subtotal for the purpose of future calculation.

2. Schedule B ? Interest and Ordinary Dividends

This section is to be completed with data from the borrower's 1040 personal tax returns. The amounts entered should reflect earnings only from interest and dividends issued as paid to the borrower from the business being evaluated. This does not include any interest earned from assets or dividends from any other sources.

a. Interest Income from SelfEmployment b. b. Dividends from Self-Employment

c. Subtotal

Input interest paid to the borrower by the business being evaluated. (Form 1040 > Schedule B > Part 1 > Line 1)

Input dividends paid to the borrower by the business being evaluated. (Form 1040 > Schedule B > Part 2 > Line 5)

This field will populate with the subtotal of the amounts entered for interest and dividends.

3. Schedule C ? Profit or Loss from Business: Sole Proprietorship (7/20/23)

This section is to be completed with the data from the borrower's 1040 personal tax returns. The amounts entered should only reflect information from one business. Any additional Schedule C businesses must be evaluated on a separate worksheet. This section should not be completed if the worksheet is also being used for any other type of self-employment (ex. 1065 or 1120s).

a. a. Net Profit or (Loss)

b. b. Nonrecurring Other (Income) Loss/Expenses

c. Depletion

Use the bottom line net income or loss reported for the business. If this is income, enter a positive number; if this is a loss, enter a negative number with a leading (-). (Form 1040 > Schedule C > Part 2 > Line 31)

Include any income or expense that is filed for the current year, but which can be determined to only have occurred this year. There is no history, and no likelihood of it repeating in the future.

? If it is a loss, it can be added back in; if it is income, it is subtracted out. ? If this is income, enter a positive number; if this is a loss, enter a negative

number with a leading (-).

(Form 1040 > Schedule C > Part 1 > Line 6 [Income]) (Form 1040 > Schedule C > Part 2 > Line 27a [Loss])

This field represents the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. The deduction accounts for the reduction of the product's reserves. This can be added back to the income subtotal as it is a non-cash. Always enter as a positive number. (Form 1040 > Schedule C > Part 2 > Line 12)

Original Issue Date: 01/21/2020 Last Revision Date: 07/20/2023 Last Reviewed Date:07/20/2023

FHA Self-Employment Income Calculation Worksheet Job Aid For Wholesale Customers Only

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a. d. Depreciation b. e. Business Use of Home

f. Mileage Depreciation This subsection allows for the calculation of depreciation due to mileage, which can be added back as a non-cash expense, when applicable.

g. Amortization/Casualty Loss h. Subtotal

This field represents the loss in value of assets, investments, etc. It is known as a "paper loss" because it is a non-cash expense. For this reason, the amount can be added back to the income subtotal. Always enter as a positive number. (Form 1040 > Schedule C > Part 2 > Line 13)

When a borrower operates the business from home and designates a portion of the home to the business, the borrower qualifies for an eligible expense. Since this is a non-cash expense, the amount can be added back to the income calculation. (Form 1040 > Schedule C > Part 2 > Line 30)

i. # of Business Miles

When a borrower has a vehicle, which is used for business purposes, the borrower can choose to file a "car and truck expense" (typically Schedule C > Part 2 > Line 9). If that expense is business mileage depreciation, the number of miles for business use can be entered here to be calculated into a dollar amount as depreciation. (Form 1040 > Schedule C > Part 4> Line 44a).

The Depreciation Rate is separate from the standard mileage rates. Refer to the IRS Standard Mileage Rates for an updated Depreciation Rate for each year.

ii. Depreciation Rate

As per IRS Notice 2019-02, the depreciation rates as noted in Section 4. Basis Reduction Amount are:

? 2020 ? 27 cents/mile ? 2021 ? 26 cents/mile ? 2022 ? 26 cents/mile

Enter the amount in this field as a decimal (ex. 26 cents would be entered as 0.26).

iii. Total Mileage Depreciation

This field is calculated by taking the # of Business Miles times the Depreciation Rate. The resulting amount is added back as a non-cash expense.

Amortization expenses are usually one-time costs that are distributed over a period of time and can therefore be added back. Casualty losses are typically nonrecurring and can also be added back. (Form 1040 > Schedule C > Part 2 > Line 27a).

The field populates with the calculated subtotal of the Schedule C section by applying lines 3.a. and 3.b. as entered (positive or negative) and calculating each other line as added or subtracted based on the mathematical symbol present beside the data entry field.

4. Schedule D ? Capital Gains and Losses

Capital gains and losses are typically one-time occurrences. These should only be considered and included in self-employment income calculations if the borrower is able to document that the gains for income are recurring year over year, and the assets, which generate the income, are likely to be retained and will continue to generate income.

Original Issue Date: 01/21/2020 Last Revision Date: 07/20/2023 Last Reviewed Date:07/20/2023

FHA Self-Employment Income Calculation Worksheet Job Aid For Wholesale Customers Only

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Unless the capital gains and losses are related to a specific business, the calculation should be performed on a separate worksheet independent of other self-employed businesses. FHA requires three years of tax returns in order to permit the use of income from capital gains.

Year b. a. Recurring Capital Gains

b. Subtotal 3 year Average Calculation

Since FHA requires three years of tax returns, there are three Year fields in this section. Each field automatically calculates and populates based on the originally entered date in the first section of the worksheet.

Enter the total income determined to be recurring from past years and into the future. This will be calculated as a three-year average.

This subtotal field copies the amount entered for income and is used to calculate the average income for this income source.

This field produces a calculated three-year average of the three subtotal amounts as entered by the user for the capital gains or losses.

5. Schedule E ? Supplemental Income and Loss

This section of the worksheet is to be used only for income and loss reported for royalties or other income sources that are not reported on the borrower's K-1, and those which are not generated from rental income producing properties. If royalty income is received from multiple sources and filed in separate columns, a separate worksheet should be completed for each instance.

K-1 income and other information will be collected and evaluated elsewhere in the worksheet.

Note: Rental income is to be calculated using the FHA REO Net Rental Income/Loss Worksheet.

a. Royalties Received b. Total Expenses c. Depletion d. Subtotal

For borrowers who have an intellectual ownership interest in an asset, they may be paid annually for their interest. This may include things like media outlets (i.e., songs, television, screenplays, etc.), or natural resources (i.e., oil), or other assets. (Form 1040 > Schedule E > Part 1 > Line 4).

Input a collective total of all expenses related to the earning of royalty income. None of the expenses related to this income may be added back except Depletion on the next line. (Form 1040 > Schedule E > Part 1 > Line 20).

This amount represents the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. The deduction accounts for the reduction of the product's reserves. This can be added back to the income subtotal as it is a noncash. Always enter as a positive number. (Form 1040 Schedule E > Part 2 > Line 18).

This field calculates a subtotal by taking the Royalties Received minus the Total Expenses, and then adding back the Depletion, when applicable.

Original Issue Date: 01/21/2020 Last Revision Date: 07/20/2023 Last Reviewed Date:07/20/2023

FHA Self-Employment Income Calculation Worksheet Job Aid For Wholesale Customers Only

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6. Schedule F ? Profit or Loss from Farming

When a borrower generates income from ownership of a farm, regardless of that farm being the subject property or not, the borrower's income and loss from the farm is filed on Schedule F.

a. Net Farm Profit or (Loss) b. Non Tax Portion Ongoing Coop and CCC Payments

c. Nonrecurring Other Income/Loss

d. Depreciation e. Business Use of Home f. Subtotal

This amount is the bottom line net income or loss reported for the farm.

? If this is income, enter a positive number in this field. ? If this is a loss, enter a negative number with a leading (-) in this field.

(Form 1040 > Schedule F > Part 2 > Line 34)

Certain federal agriculture program payments, coop distributions, and insurance/loan proceeds are not fully taxable. In this field, add back the nontaxable portion of these income types provided these sources of income are likely to continue and do not represent a one-time occurrence.

Other income reported on Schedule F represents income received by a farmer that was not obtained through farm operations.

? Deduct other income in this field unless the income is determined to be recurring.

? If the income is determined to be recurring, no adjustment is required. Other loss may be added back when it is determined that the loss will not continue.

? When entering income, enter as a positive number; when entering a loss, enter as a negative number.

(Form 1040 > Schedule F > Part 1 > Line 8 ([Income]) (Form 1040 > Schedule F > Part 2 > Line 32 ([Loss])

This field represents the loss in value of assets (ex. trucks, buildings, etc.). It is known as a "paper loss" because it is a non-cash expense. For this reason, the amount can be added back to the income subtotal. Always enter as a positive number. (Form 1040 > Schedule F > Part 2 > Line 14)

When a farmer uses their personal home for any portion of operating the business, the borrower qualifies for an eligible expense. Because this is a non-cash expense, the amount can be added back to the income calculation. (Form 1040 > Schedule F > Part 2 > Line 32)

This field calculates the subtotal of the Schedule C section.

? Lines 6.a and 6.c are applied as entered (positive or negative). ? Each other line is calculated as added or subtracted based on the

mathematical symbol present beside the data entry field.

Combined Total from IRS Form 1040

This field calculates the total of all subtotals from sections 1 through 3, 5, and 6. Capital gains/losses are held separately and are conveyed at the bottom of the form independent of all other income sources.

Original Issue Date: 01/21/2020 Last Revision Date: 07/20/2023 Last Reviewed Date:07/20/2023

FHA Self-Employment Income Calculation Worksheet Job Aid For Wholesale Customers Only

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IRS Form 1065 ? Partnership Income This section will collect information procured from the borrower's 1065 tax returns. There are two Year fields, which will be auto completed based on the entry of the first year in the IRS Form 1040 section above.

7. Schedule K-1 Form 1065 ? Partner's Share of Income Information for this section will be taken directly from the Schedule K-1 form. This information will represent the income for one borrower at a time.

a. Ordinary Income (Loss)

b. Net Rental Real Estate; Other Net Income (Loss)

c. Guaranteed Payments to Partner d. Subtotal

For this field, use the number directly from the Schedule K-1. This is the first income field to consider when determining whether income is supported by distributions.

? If income, enter as a positive number; if loss, enter as a negative number. ? If the income is not supported and cannot be considered as qualifying income,

leave this field as zero.

(Form 1065 > Schedule K-1 > Part 3 > Line 1)

Add the amounts of the Net Rental Real Estate and Other Net Rental income or losses. These are the remaining income fields to consider when determining whether income is supported by distributions.

? If income, enter as a positive number; if loss, enter as a negative number. ? If the income is not supported and cannot be considered as qualifying

income, leave this field as zero.

(Form 1065 > Schedule K-1 > Part 3 > Line 2) (Form 1065 > Schedule K-1 > Part 3 > Line 3)

For this field, use the number directly from the Schedule K-1. If income, enter as a positive number; if loss, enter as a negative number. This income field is not considered when determining whether income is supported by distributions. If the business appears stable and sustainable, and the appropriate history of receipt is documented, this income can be used for qualifying. (Form 1065 > Schedule K-1 > Part 3 > Line 4)

This field calculates the subtotal of Section 7 to represent the entirety of income eligible to qualify the borrower.

8. Form 1065 ? Adjustments to Business Cash Flow

Information for this section will be taken directly from the business tax returns, Form 1065, except for the percentage of ownership for which the K-1 will be reviewed again.

Original Issue Date: 01/21/2020 Last Revision Date: 07/20/2023 Last Reviewed Date:07/20/2023

FHA Self-Employment Income Calculation Worksheet Job Aid For Wholesale Customers Only

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This information will represent the income and expenses for the entire business. The percentage of ownership will be applied to the borrower's portion only for qualifying purposes.

a. Ordinary (Income) Loss from Other Partnerships

b. Nonrecurring Other (Income) Loss

c. Depreciation

d. Depletion e. Mortgage or Notes Payable in Less than 1 Year f. Subtotal g. % of Ownership h. Subtotal Form 1065

In order to use income from another business that is being passed through the business being evaluated, ensure the income can be properly documented as per guidelines.

? If it cannot, enter the amount as a negative in order to "back it out" as not eligible.

? If there is a loss reported that can be documented as not likely to continue, the amount can be entered as a positive number to "add it back".

(Form 1065 > Page 1 > Line 4)

This amount typically represents income or loss not directly related to the business, or otherwise not likely to continue or without history.

? If the amount is income, enter in the amount as a negative in order to "back it out" as not eligible.

? If it is a loss, enter the amount as a positive in order to "add it back".

(Form 1065 > Page 1 > Line 7)

This field represents the loss in value of assets, investments, etc. It is known as a "paper loss" because it is a non-cash expense. For this reason, the amount can be added back to the income subtotal. Always enter as a positive number. (Form 1065 > Page 1 > Line 16a)

This field represents the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. The deduction accounts for the reduction of the product's reserves. This can be added back to the income subtotal as it is a non-cash. Always enter as a positive number. (Form 1065 > Page 1 > Line 17)

In this field, subtract the amount of mortgage or note obligations payable in less than one year. This deduction is not required for lines of credit or if there is evidence that these obligations roll over regularly and/or the business has sufficient liquid assets to cover them. (Form 1065 > Schedule L > Line 16 > Column D)

This field calculates the subtotal of all information gathered from Form 1065.

In this field, enter the percentage of ownership the borrower has in the business. This will allow the worksheet to calculate only that percentage which can be added back from the Form 1065. (Form 1065 > Schedule K-1 > Part 2 > Line J)

This field calculates the subtotal of expenses to add back by the percentage of ownership in order to determine the amount which can be added to the eligible income from Schedule K-1 for qualifying.

Combined Total from Partnership

This field calculates the total of the two subtotals from sections 7 and 8 to determine the total income as derived from the Form 1065.

IRS Form 1120's ? S Corporation Earnings

This section will collect information procured from the borrower's 1120s tax returns. There are two Year fields, which will be auto-completed based on the entry of the first year in the IRS Form 1040 section above.

Original Issue Date: 01/21/2020 Last Revision Date: 07/20/2023 Last Reviewed Date:07/20/2023

FHA Self-Employment Income Calculation Worksheet Job Aid For Wholesale Customers Only

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9. Schedule K-1 Form 1120S ? Shareholder's Share of Income

Information for this section will be taken directly from the Schedule K-1 form. This information will represent the income for one borrower at a time.

This is the first income field to consider when determining whether income is supported by distributions. Using the Schedule K-1, input the appropriate amount.

a. Ordinary Income (Loss)

? If income, enter as a positive number; if loss, enter as a negative number. ? If the income is not supported and cannot be considered as qualifying income,

leave this field as zero.

(Form 1120s Schedule K-1 > Part 3 > Line 1)

These are the remaining income fields to consider when determining whether income is supported by distributions. Add the amounts of the Net Rental Real Estate and Other Net Rental income or losses.

b. Net Rental Real Estate; Other Net Income (Loss)

? If income, enter as a positive number; if loss, enter as a negative number. ? If the income is not supported and cannot be considered as qualifying income,

leave this field as zero.

(Form 1120s Schedule K-1 > Part 3 > Line 2) (Form 1120s Schedule K-1 > Part 3 > Line 3)

Note: There is no "Guaranteed Payments" on this form. Guaranteed payments from 1120s are reported on a W-2.

10. Form 1120S ? Adjustments to Business Cash Flow

Information for this section will be taken directly from the business tax returns, Form 1120s, except for the percentage of ownership for which the K-1 will be reviewed again. This will be representative of income and expenses for the entire business. The percentage of ownership will be applied to the borrower's portion only for qualifying purposes.

This typically represents income or loss not directly related to the business, or otherwise not likely to continue or without history.

a. Nonrecurring Other (Income) Loss

? If the amount is income, enter in the amount as a negative in this field in order to "back it out" as not eligible.

? If it is a loss, enter the amount as a positive in this field in order to "add it back".

b. Depreciation

(Form 1120s > Page 1 > Line 5)

This field represents the loss in value of assets, investments, etc. It is known as a "paper loss" because it is a non-cash expense. For this reason, the amount can be

Original Issue Date: 01/21/2020 Last Revision Date: 07/20/2023 Last Reviewed Date:07/20/2023

FHA Self-Employment Income Calculation Worksheet Job Aid For Wholesale Customers Only

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