Lending Advice, 2 years of tax returns

6 Replies

Hello,

I am a small business owner who is in the process of shutting down one business and building a new one.  I also have 3 properties that are cash flow positive and humming along that I purchased about 2 years ago. My previous business has been good and healthy, with it being in the black for several years.

This year my corporate financials continue to be in the black, however I haven't taken a paycheck.  I've been living off my savings. My goal is to purchase more investment real estate next year, however I'm faced with a dilemma of possibly not looking the best to lenders. I'm looking at my options as:

1) Take a paycheck this year, which would put me at a loss on paper for one of the corporations but I would have a healthy W-2

2) Don't take a paycheck so I would have almost no W-2 earnings this year, but I would be in the black on my corporate financials.


Of course there's "make more revenue and profit", working on that :) But if I'm forced with option 1 or 2, do any lenders or RE investors out there have an opinion on what would look more favorable to them?


Thanks!

Originally posted by @John M.:

Hello,

I am a small business owner who is in the process of shutting down one business and building a new one.  I also have 3 properties that are cash flow positive and humming along that I purchased about 2 years ago. My previous business has been good and healthy, with it being in the black for several years.

This year my corporate financials continue to be in the black, however I haven't taken a paycheck.  I've been living off my savings. My goal is to purchase more investment real estate next year, however I'm faced with a dilemma of possibly not looking the best to lenders. I'm looking at my options as:

1) Take a paycheck this year, which would put me at a loss on paper for one of the corporations but I would have a healthy W-2

2) Don't take a paycheck so I would have almost no W-2 earnings this year, but I would be in the black on my corporate financials.

Of course there's "make more revenue and profit", working on that :) But if I'm forced with option 1 or 2, do any lenders or RE investors out there have an opinion on what would look more favorable to them?

Thanks!

 Hi John,

Unfortunately, without all of your federal tax returns, personal and business, all pages, and all schedules, no one can answer this with any reliability. However I will point out that "W2!" is not a magic word, when it comes to self employed persons - erase that notion from your mind. 

Hi Chris,

Gotcha, thanks for the input about the W-2 and lending.

I should probably clarify my question is a bit between lending and tax.  The thought for the W-2 is to mitigate against audit. E.G. if my corporation has $500k in revenue and $500k in expenses (without me taking a paycheck), my understanding is that the IRS wants to make sure I'm not putting personal expenses onto the corporation (which I'm not).

Hi @John M.,

There's quite a lot to unpack here and @Chris Mason is correct that no one can make a determination without all of the relevant details.  

With that said we can take a look at more of the thought process side of things rather than the particulars.  What kind of real estate are you looking to buy?  If you will be seeking residential financing vs commercial financing, then your strategy in terms of strengthening your business financials vs your personal side may help to guide your decision.  

From the commercial side, shutting down a profitable business to open a brand new one adds some uncertainty to the equation.  A new business will not have a history of financials to offer a lender confidence of repayment on the loan.  

Is there a way to keep your existing business running while opening the new one?  Could the new business be opened as a new division of the existing business?  Would you be willing to put up the equity in your properties as collateral for the new loan?  

With the limited information we have, it sounds like you have a track record of business profitability, assets that can support further indebtedness, and an openness to structuring your profile in an appropriate strategic manner.  Hopefully you are able to find a lender that will take the time to understand where you're coming from and look at your situation holistically.  Preferably one with a problem-solver mindset.  

Best of luck to you!

**Note:  I am not an attorney or a CPA and the above should not be misconstrued as legal or financial advice.  Please consult with your professional advisor(s).  

John M. My advice is for you to find a good CPA in your area that has real estate holdings and ask for their counsel. There are many lending institutions that do not ask for tax returns. Finding funding should not be an issue.

This really falls more into talking to a good lender than a CPA.

Having a w-2 by a business that is showing losses won't help you. Most lenders look at the big picture. If you have a w-2 that's good and also have a business showing losses- I believe most lenders take it all into account.

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