A big part of a business loan analyst's job is to look over tax forms, which help them figure out how financially stable and creditworthy a borrower is. Here's a step-by-step guide on how to look over tax forms correctly for lending money:
1. Know which tax forms you need to fill out.
Learn about the specific tax forms that are usually needed to apply for a business loan, such as
This is Form 1040, which is an individual's income tax form (for sole proprietors).
Partner income tax report, Form 1065.
Business income tax form, Form 1120.
The S Corporation income tax report is on Form 1120S.
Schedule C shows how much money a sole owner made or lost from their business.
Partner's part of income, deductions, and credits are shown on Schedule K-1.
2. Make sure it matches up with other financial records.
Refer to this: Check the borrower's tax returns against their financial statements, such as their balance sheets and income statements. Check to see if the stated assets, income, and expenses are all the same.
Data from the past: Look at your tax returns from earlier years to see how your income, expenses, and net income have changed over time.
3. Look at how income is reported
Total Income: On the tax forms, look for the total amount of money that was made. Make sure it fits with how the borrower's business works and any financial records that are given.
Income Sources: List the different ways you can make money and rate how reliable and long-lasting each one is. Are there any one-time wins or strange ways to make money?
4. Look over your expenses and deductions
Costs of doing business: Check out the list of running costs on the tax forms. Check for big expenses that could change your net income.
Deductions Not Allowed: Keep an eye out for any expenses that aren't allowed because they could be a sign of dishonest tax planning or lying about your financial health.
5. Look at your tax obligations and payments: Check to see if the borrower has paid their taxes on time. Not paying or being behind on taxes can be a red flag.
Cash refunds or debts: Check to see if the user is due a refund or has extra tax obligations that could affect their cash flow.
6. Look at your cash flow
Cash Flow Analysis: With cash flow analysis in mind, look at the tax forms. Figure out the operating cash flow, taking into account non-cash things and one-time costs.
The debt service coverage ratio, or DSCR, is: Find out if the borrower can pay back their debts by figuring out the DSCR, which is based on net operating income (NOI) and total debt payment.
7. Look for red flags
Discrepancies: Look for differences or inconsistencies between what you say about your income, spending, and financial statements. Changes that are very noticeable may need more research.
Unusual Trends: Look for strange patterns in your income or spending that could mean you're having money problems or running your business poorly.
8. Talk to the borrower to get more information
Find Out More: If something isn't clear or doesn't make sense, ask the loan to explain it. Knowing the background can give you useful information.
Documentation: If you need more proof, like bank records or more financial information, ask for it.
9. Write down the results
Summary of Insights: Write an outline of what you learned from looking over the tax forms, pointing out important points, any mistakes, and any possible risks that come with the loan application.
Internal Reporting: Include your evaluation in any internal loan analysis reports or credit notes that give a full picture of the borrower's money problems.
10. Keep up with changes to tax rules
Know About Taxes: Keep up with the latest tax laws and rules, as they can change how businesses report their income and spending.
Continuous Learning: Take part in professional development to get better at business lending and tax analysis.
By doing these things, a business loan analyst can properly look over tax forms, getting a full picture of a borrower's finances and making smart lending choices.
1. Know which tax forms you need to fill out.
Learn about the specific tax forms that are usually needed to apply for a business loan, such as
This is Form 1040, which is an individual's income tax form (for sole proprietors).
Partner income tax report, Form 1065.
Business income tax form, Form 1120.
The S Corporation income tax report is on Form 1120S.
Schedule C shows how much money a sole owner made or lost from their business.
Partner's part of income, deductions, and credits are shown on Schedule K-1.
2. Make sure it matches up with other financial records.
Refer to this: Check the borrower's tax returns against their financial statements, such as their balance sheets and income statements. Check to see if the stated assets, income, and expenses are all the same.
Data from the past: Look at your tax returns from earlier years to see how your income, expenses, and net income have changed over time.
3. Look at how income is reported
Total Income: On the tax forms, look for the total amount of money that was made. Make sure it fits with how the borrower's business works and any financial records that are given.
Income Sources: List the different ways you can make money and rate how reliable and long-lasting each one is. Are there any one-time wins or strange ways to make money?
4. Look over your expenses and deductions
Costs of doing business: Check out the list of running costs on the tax forms. Check for big expenses that could change your net income.
Deductions Not Allowed: Keep an eye out for any expenses that aren't allowed because they could be a sign of dishonest tax planning or lying about your financial health.
5. Look at your tax obligations and payments: Check to see if the borrower has paid their taxes on time. Not paying or being behind on taxes can be a red flag.
Cash refunds or debts: Check to see if the user is due a refund or has extra tax obligations that could affect their cash flow.
6. Look at your cash flow
Cash Flow Analysis: With cash flow analysis in mind, look at the tax forms. Figure out the operating cash flow, taking into account non-cash things and one-time costs.
The debt service coverage ratio, or DSCR, is: Find out if the borrower can pay back their debts by figuring out the DSCR, which is based on net operating income (NOI) and total debt payment.
7. Look for red flags
Discrepancies: Look for differences or inconsistencies between what you say about your income, spending, and financial statements. Changes that are very noticeable may need more research.
Unusual Trends: Look for strange patterns in your income or spending that could mean you're having money problems or running your business poorly.
8. Talk to the borrower to get more information
Find Out More: If something isn't clear or doesn't make sense, ask the loan to explain it. Knowing the background can give you useful information.
Documentation: If you need more proof, like bank records or more financial information, ask for it.
9. Write down the results
Summary of Insights: Write an outline of what you learned from looking over the tax forms, pointing out important points, any mistakes, and any possible risks that come with the loan application.
Internal Reporting: Include your evaluation in any internal loan analysis reports or credit notes that give a full picture of the borrower's money problems.
10. Keep up with changes to tax rules
Know About Taxes: Keep up with the latest tax laws and rules, as they can change how businesses report their income and spending.
Continuous Learning: Take part in professional development to get better at business lending and tax analysis.
By doing these things, a business loan analyst can properly look over tax forms, getting a full picture of a borrower's finances and making smart lending choices.