Regulation Change Update:
The following blog was posted in January of 2013 and the regulations have changed since we posted.
Question:
When reviewing business tax returns such as 1165, 1120S, and 1120, should we treat any additional income derived from the business returns all the same regardless of FNMA or FHLMC?
Answer:
FNMA and FHLMC have different rules for each of the business income types and must be analyzed differently. The chart below shows how to apply the additional business income or loss depending on the type of business returns reviewed.
| Business Type | Agency | Tax Form | Explanation of Income | AllRegs Reference |
|---|---|---|---|---|
| Partnership / LLC | FNMA | 1065 | Allows for addition or subtraction of borrower’s percentage of ownership. | FNMA B3-3.2.2-01 |
| Partnership / LLC | FHLMC | 1065 | Only allows for addition of income IF borrower is 100% OR has express written consent documented by a corporate resolution or other corporate document that establishes the right. Losses must be applied based on percentage of ownership. | FHLMC SSG vol 1 37.13 sec vii B |
| S Corporation | FNMA | 1120S | Allows for addition or subtraction of borrower’s percentage of ownership. | FNMA B3-3.2.2-03 |
| S Corporation | FHLMC | 1120S | Only allows for addition of income IF borrower is 100% OR has express written consent documented by a corporate resolution or other corporate document that establishes the right. Losses must be applied based on percentage of ownership. | FHLMC SSG vol 1 37.13 sec vii B |
| Corporation | FNMA | 1120 | Not allowed for additional income UNLESS borrower is 100% owner. However borrowers percentage of losses must always be subtracted. | FNMA B3-3.2.2-03 |
| Corporation | FHLMC | 1120 | Only allows for addition of income IF borrower is 100% OR has express written consent documented by a corporate resolution or other corporate document that establishes the right. Losses must be applied based on percentage of ownership. | FHLMC SSG vol 1 37.13 sec vii B |
I have always found the 1084 and form 91 lacking because they don’t do a great job in explaining every line of the business tax returns from which you can get additional income with which to qualify a borrower. The also fail to tell you about the requirements we just reviewed.
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