Red flags and green lights in tax returns

Red Flags and Green Lights in Tax Returns

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Extended Handout on Red Flags and Green Lights.

Poll Question 1

What is your role in tax return analysis? Choose all that apply:1. Business Development Officer2. Lender3. Credit analyst/Underwriter4. Lending Manager/Banking executive5. Something else

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Poll Question 2

What is your (or your team’s) biggest challenge in analyzing tax returns? Choose all that apply:1. Competence2. Confidence3. Consistency4. Experience5. Something else


Start with Income Statements



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


Dropping revenue


Increasing returns & allowance compared to

gross receipts.

Did they just launch a new product?


Obsolete inventory?





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.


Add home office deduction back to avoid

double-counting.


Consider whether you really should not add

depreciation back every time, even if your software

‘says’ to.


Poll Question 3

How do junior lenders or new hires learn about your approach to tax return analysis?1. On-the-job training2. Formal training programs3. By copying what has been done before4. From Linda Keith CPA “-)5. Something else



Missing Red FlagBad 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.


Info from ‘Other Information’


Missing pages of the tax return…


From the Balance Sheets


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.


Recurring Cashflow

after debt was -$54,000

CHATHow are they making up the cashflow shortfall? Chat it in but don’t hit send until I ask you to.


What is wrong with this picture?

No current portion of long-term debt.

Negative Retained Earnings…. although

CHAT


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?


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.comCall me at 360-866-1982


Capital Gains and Losses



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.


Consider annuitizing the portfolio.

Pass-thru Entities


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 E2. Non-passive from 1040 Schedule E3. Distributions/gtd pmnts from K-14. Loans to/from shareholder5. Cashflow available from the entity


What can you tell from this 1040 Schedule E, Page Two


This is not a red flag.This is not a green light.It is not enough information!


It’s a wrap!


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