Looking at self-employed borrower income for tax year 2021

Every year mortgage professionals work with self-employed borrowers to determine their taxable income. MGIC Customer Trainer Jeff Platfoot joins us to discuss 2021 tax returns and what’s changed for this year, including mileage and meal deduction.

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Transcript

Concepcion (00:04): 

Hello, and welcome to Mortgage Connects by MGIC bringing you the latest insights from top mortgage professionals around the industry. I'm your host Concepcion Guerrero and joining me today is MGIC's customer trainer, Jeff Platfoot. I'm excited for today's topic because what you'll be sharing comes at a perfect time as many of us started 2022 at full force. So, Jeff, what can you tell us about the new mileage change and meal deduction? 

Jeff (00:30): 

Hi, thanks, Concepcion. You know, every year mortgage professionals work with so many different self-employed borrowers. So we're always getting tax returns and digging into those tax returns and trying to determine income. And this year for 2021, as we're in 2022, looking at 2021 tax returns that are being completed right now by borrowers, there are two areas, as you mentioned: mileage and meals and entertainment that can affect our overall income. So in 2020, the mileage depreciation factor was 27 cents that did change for our most recent year 2021. And it's now 26 cents a mile. So 27 cents and 2020, and 26 cents a mile in 2021. The other change that can have an impact on your overall income and ratios is that the IRS did allow, or does allow in 2021 for self-employed borrowers to ride off 100% of their meals. And what that does for us and how that impacts us is in the past, we've always accounted for only 50% of meals and entertainment being written off through the IRS and somebody that's self-employed that has changed to a hundred percent. 

Jeff (02:01): 

So what that means to us is that we will now look at meals and entertainment, keeping in mind that the IRS allows meals only at 100% write off for 2021. It can impact our ratios. It can impact our ratios in a positive way. So what we're recommending is is that we approach this the way we always have in past years, account for what we see for meals and entertainment exclusion, subtract that out on the worksheets that you've used. With that said, if that deduction really affects your ratios negatively, has this terrible impact on your ratios, please look at and determine whether or not those meals were written off at 100%. If they were, you will have a less deduction, a less of a deduction on your worksheet. So your ratios won't be as impacted as negatively. Keep in mind that when you look at a schedule C sole proprietorship, we just see meals and entertainment we don't know what the breakout is. So you very well might need to talk to the tax preparer for that return to have them determine what the meal per write off was versus the entertainment write off. 

Jeff (03:24): 

When we talk about partnerships S-corps and corporations, and meals and entertainment as a write off, that typically that return that business return typically will include a statement. And that statement typically will have it broken out. Here's your amount for meals here. Here's your amount for entertainment. So most times we'll be able to identify what the percentage of the write off was for meals, with the exception of schedule C sole proprietors. We might have to have additional clarification provided by the tax preparer. As a side note, we're getting ready to release our new updated calculator worksheets for self-employed borrowers. So keep that in mind as well. So that's it. So thank you very much, Concepcion. 

Concepcion (04:22): 

Thank you. Thank you so much, Jeff, for joining me today and for the timely updates regarding mileage change and meal deduction. And thank you all for listening for all the latest industry insights, subscribe to Mortgage Connects on Apple, Stitcher, Google podcast, Spotify, Amazon music, or go to mortgageconnects.com.