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APPENDIX 2.0 – ANALYZING IRS FORMS (04/10/2025)
IRS Form 1040 Heading Description Wages, Salaries and Tips An amount shown under this heading may indicate that the individual:
• is a salaried employee of a corporation; or
• has other sources of income. This section may also indicate that the spouse is employed, in which case the spouse’s income must be subtracted from the Borrower’s gross income. Business Income and Loss (from Schedule C)
Sole proprietorship income calculated on Schedule C is business income. Depreciation, depletion, business use of home, amortization, and casualty losses may be added back to the gross income. Business Use of Home Mortgage interest, Mortgage Insurance Premiums (MIP), real estate taxes, and property insurance deducted for business use of a house may be added back to the gross income. Rents, Royalties, Partnerships (from Schedule E)
Any net income from rental properties or royalties may be used as Effective Income, after adding back any depreciation, mortgage interest, taxes, insurance, and any HOA dues shown on Schedule E. Any net loss must be subtracted from Effective Income. Capital Gain and Losses (from Schedule D)
Capital gains or losses generally occur only one time, and should not be considered when determining Effective Income. However, if the individual has a constant turnover of assets resulting in gains or losses, the capital gain or loss must be considered when determining the income. Three years’ Tax Returns are required to evaluate an earnings trend. If the trend:
• results in a gain, it may be added as Effective Income; or
• consistently shows a loss, it must be deducted from the total income. Interest and Dividend Income (from Schedule B)
This taxable/tax-exempt income may be added back to the adjusted gross income only if it:
• has been received for the past two years; and
• is expected to continue.
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Appendix 2.0 – Analyzing IRS Forms (04/10/2025)
IRS Form 1040 Heading Description If the interest-bearing asset will be liquidated as a source of the cash investment, the Mortgagee must appropriately adjust the amount. Farm Income or Loss (from Schedule F)
Any depreciation shown on Schedule F may be added back to the gross income. IRA Distributions, Pensions, Annuities, and Social Security Benefits
The nontaxable portion of these items may be added back to the adjusted gross income, if the income is expected to continue for the first three years of the Mortgage.
Adjustments to Income Adjustments to income may be added back to the adjusted gross income if they are:
• IRA and Keogh retirement deductions; or
• penalties on early withdrawal of savings health insurance deductions, and Alimony payments. Analyzing IRS Form 1120, U.S. Corporation Income Tax Return
A Corporation refers to a state-chartered business owned by its stockholders.
To determine the Borrower’s income, the adjusted business income must be multiplied by the Borrower’s percentage of ownership in the business.
Corporate compensation to the officers, in proportion to the percentage of ownership, is shown on the corporate Tax Return (IRS Form 1120), and individual Tax Returns. If the Borrower’s percentage of ownership does not appear on the Tax Returns, the Mortgagee must obtain the information from the corporations’ accountant, along with evidence that the Borrower has the right to any compensation.
The table below describes the items found on IRS Form 1120 for which an adjustment must be made in order to determine adjusted business income.
Adjustment Item Description of Adjustment Depreciation, Depletion, Amortization, and Casualty Losses
Add the corporation’s depreciation, depletion, amortization, and non-recurring casualty losses 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 corporate income to the individual Tax Return. Cash Withdrawals The Borrower’s withdrawal of cash from the corporation may have a severe negative impact on the corporation’s ability to continue operating.
Analyzing IRS Form 1120-S, U.S. Income Tax Return for an S Corporation
An “S” Corporation refers to a small start-up business, with gains and losses passed to stockholders in proportion to each stockholder’s percentage of business ownership.
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Appendix 2.0 – Analyzing IRS Forms (04/10/2025)
Income for owners of “S” corporations comes from IRS Form W-2 wages, and is taxed at the individual rate. The IRS Form 1120-S Compensation of officers line item is transferred to the Borrower’s individual IRS Form 1040, U.S. Individual Income Tax Return.
Depreciation, depletion, amortization, and non-recurring casualty losses may be added back to income in proportion to the Borrower’s percentage of ownership in the corporation.
The Borrower’s income must be reduced proportionately by the total obligations payable by the corporation in less than one year.
Analyzing Schedule K-1 (IRS Form 1065), U.S. Return of Partnership Income
A Partnership refers to when two or more individuals form a business, and share in profits, losses, and responsibility for running the company. Each partner pays taxes on their proportionate share of the partnership’s net income.
Both general and limited partnerships report income on IRS Form 1065, and the partners’ share of income is carried over to Schedule E of IRS Form 1040.
Depreciation, depletion, amortization, and non-recurring casualty losses may be added back to the income in proportion to the Borrower’s share of the income.
The Borrower’s income must be reduced proportionately by the total obligation payable by the partnership in less than one year.
Page 1779
Appendix 3.0 – Post-endorsement Fees and Charges by Location (Applies to Servicing Only) (11/10/2026)