Red flags and green lights in tax returns
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Competent tax return analysis is critical to saying ‘yes’ to good loans. Yet it is more than mere numbers and formulas. In this webinar, Linda Keith CPA cover some of the red flags that should stop you in your tracks when you see them in a prospective borrower’s return. And, sometimes a red flag is a green light in disguise.
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Red flags and green lights in tax returns
- 1. Red Flags and Green Lights in Tax Returns
- 2. Make Good Loans. Make More Loans!
- 3. Weekly Webinars Virtual Class Tax Return Analysis
- 4. www.LindaKeithCPA.com/Sageworks.htm Linda@LindaKeithCPA.com Extended Handout on Red Flags and Green Lights.
- 5. Poll Question 1 What is your role in tax return analysis? Choose all that apply: 1. Business Development Officer 2. Lender 3. Credit analyst/Underwriter 4. Lending Manager/Banking executive 5. Something else © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 5
- 6. Poll Question 2 What is your (or your team’s) biggest challenge in analyzing tax returns? Choose all that apply: 1. Competence 2. Confidence 3. Consistency 4. Experience 5. Something else © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 6
- 7. Start with Income Statements © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 7
- 8. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 8
- 9. Does the company have LLC after the name? How can a business mitigate risk? 1)Good business practices 2)Adequate insurance 3)Entity choice CHAT © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 9
- 10. Dropping revenue © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 10
- 11. Increasing returns & allowance compared to gross receipts. Did they just launch a new product? © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 11
- 12. Obsolete inventory? © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 12
- 13. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 13
- 14. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 14
- 15. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 15
- 16. Exception: Wages higher than $150,000 or so top out on payroll taxes so less than 10% might be fine. Overpaid in the previous year? Take a look. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 16
- 17. Add home office deduction back to avoid double-counting. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 17
- 19. Consider whether you really should not add depreciation back every time, even if your software ‘says’ to. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 19
- 20. Poll Question 3 How do junior lenders or new hires learn about your approach to tax return analysis? 1. On-the-job training 2. Formal training programs 3. By copying what has been done before 4. From Linda Keith CPA “-) 5. Something else © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 20
- 21. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 21
- 22. Missing Red Flag Bad debts is blank if cash basis! CHAT Two items you would wonder about and maybe ask about. Do not hit enter until I ask you to. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 22
- 23. Info from ‘Other Information’ © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 23
- 24. Missing pages of the tax return… © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 24
- 25. From the Balance Sheets © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 25
- 26. Fast Growing Companies Dropping Liquidity is usually a bad sign. Watch for drop in cash or liquidity ratios. But growing companies raise capital, spend it on expansion, and then raise it again. If they are working through excess liquidity targeted for growth, they may be on target. Before you worry about dropping liquidity, look for their pattern and compare their liquidity ratios to reliable industry averages. Great source for industry comparative analysis. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 26
- 27. Recurring Cashflow after debt was -$54,000 CHAT How are they making up the cashflow shortfall? Chat it in but don’t hit send until I ask you to. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 27
- 28. What is wrong with this picture? No current portion of long-term debt. Negative Retained Earnings…. although CHAT © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 28
- 29. If your analysis starts with taxable income from page one of the tax return: Do your lenders know NOT TO add back depreciation every place they see it? Does your analysis start with net income per books from M- 1 Line 1? © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 29
- 30. Request the Extended handouts at www.lindakeithcpa.com/sageworks.htm Before we finish with Capital Gains and Pass-Thru Entities: Here is how I help lenders say ‘Yes’ to good loans! Tax Return Analysis Training • In Person or Virtual • In house or open enrollment • Self-study online or in print Find me at www.LindaKeithCPA.com Call me at 360-866-1982 © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 30
- 31. Capital Gains and Losses © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 31
- 32. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 32
- 33. 9,699 12,875 -3,176 Which number is relevant to cash flow? Significant and continuing negative cash flow from capital losses. Positive cash flow from assets held long-term. Check the proceeds, not the gain or loss. © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 33
- 34. Consider annuitizing the portfolio.
- 35. Pass-thru Entities © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 35
- 36. Poll Question 4 What numbers do you consider for cashflow to an owner/guarantor from their pass-through entity? (Select all that apply) 1. Passive from 1040 Schedule E 2. Non-passive from 1040 Schedule E 3. Distributions/gtd pmnts from K-1 4. Loans to/from shareholder 5. Cashflow available from the entity © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 36
- 37. What can you tell from this 1040 Schedule E, Page Two © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 37
- 38. This is not a red flag. This is not a green light. It is not enough information! © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 38
- 39. It’s a wrap! © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 39
- 40. • ALLL & Stress Testing • Learn from Linda Keith CPA and more of banking’s best consultants • Learn from and share best practices with your peers • More info: web.sageworks.com/summit © Linda Keith CPA Inc April 2014 | Extended handouts at www.lindakeithcpa.com/sageworks.htm | 40