Un-Reimbursed Bus. Expenses & Mortgage

Un-reimbursed business expenses Home Loan

Form 2106 is a federal tax form where an individuals un-reimbursed business expenses are filed.   At any time in an Arizona tax filers life except when qualifying for an FHA, VA, Conventional, USDA or Jumbo mortgage the bigger the number (meaning the more expenses deducted) on this IRS form the better.  Why?   The total expenses on this form directly reduce a taxpayers taxable income (refer to a CPA or tax professional regarding advice on what may or may not be included on this form).   Before we jump into why exorbitant expenses on an Arizona filers 2016 are not so good when its time to buy a house let’s dig a little deeper into how the 2106 works.

What Expenses Go on a Federal 2106 Tax From?

There are a number of different expenses that can be deducted on this form Sample 2106 Form. Generally speaking, expenses that are viewed as relative to conducting business are placed here.  The main expense categories on the all important 2106 form are:

1. Vehicle expenses
2. Parking fees, Tolls and transportation (including bus, train that did not involve overnight travel)
3. Travel expense while away from home overnight (lodging, airplane, rental car etc..)
4. Business expenses not included in category 1, 2 and 3 that are also not in the category of “meals and entertainment”
5. Meals and entertainment

Things start getting interesting when you get to the section labeled “expenses reimbursed by employer.” Why is this so important for an Arizona Mortgage Applicant?  With relation to filing ones taxes and trying to reduce federal tax liability, the IRS is concerned with what expenses were NOT reimbursed by an employer.  Uncle Sam gives qualified tax payers a break (aka a “deduction”) for every dollar they claim in un-reimbursed business expenses.   Naturally, Phoenicians are on the hunt to take advantage of every tax advantage they can find.  As a result they load up their 2106 with every un-reimbursed business expense they can scrounge up.  Why?  This lowers their  federal tax burden.  For example if a taxpayer is in a 30% federal tax bracket, they will save $.30 on their tax debt for every $1.00 they deduct as an un-reimbursed business expense on their 2106.  It’s a win win right?  WRONG!  If a buyer is looking to qualify for a mortgage to buy an Arizona home the 2106 can drastically change what they are qualified for.  Here is why.

Arizona Lenders & Un-Reimbursed Bus Expenses

In theory, a phoenix area mortgage lender will look at a 2106 EXACTLY the same way the IRS does.  We will see that these expenses cost a home loan applicant money and lower the amount of disposable income they had available to them.  This is exactly why the IRS gives that same person a break on taxes.  While the theory is the same from IRS to Arizona Mortgage Lender the impact on tax returns vs. mortgage application are very different.

The Phoenix area mortgage applicant that claims 2106 expenses is essentially saying that they spent part of their own income on business related expenses.  Mortgage underwriters are most concerned with (in fact only concerned with) the un-reimbursed expenses on the mortgage applicant’s 2106.   The dollar amount that a mortgage applicant claims as un-reimbursed expenses is subtracted form the income they can use to qualify for a new Arizona mortgage. Let’s look at an example:

Example:
Borrower’s Gross annual income: $85,000
Total un-reimbursed business expenses: $10,000
Total Income Borrower can use to qualify for a new mortgage: $75,000 (Gross income – Un-reimbursed business expenses)

The difference between what a borrower can qualify for with an income of $85,000 versus $75,000 is very different.  If an Arizona Loan Officer neglects to examine a mortgage applicant’s most recent 2 years complete federal tax returns properly, they are setting their client up for a MAJOR surprise at closing.  The un-reimbursed business expenses will come up at some point.  Each and EVERY Arizona home loan applicant must have tax transcripts ordered from the IRS by their mortgage company.  Guess what shows up on federal tax transcripts?  You got it – un-reimbursed business expenses.

So, even if tax returns are not requested (as they should be by every Phoenix area mortgage loan officer on every file) there is no hiding from un-reimbursed business expenses.  Instead, if you have a neglectful/careless loan officer it simply is a matter of delaying the inevitable until later in the home buying/loan process when the mortgage underwriter examines the loan applicant tax transcripts.

Your Arizona Loan Officer Can Protect You

Your Arizona Mortgage Lender must always request and examine your most recent 2 years federal tax returns.  They should also order 2 years federal tax transcripts from the IRS at the beginning of the mortgage process so that all un-reimbursed business expenses can be clearly identified prior to shopping for a home and completing mortgage pre-approval.  This is standard practice on my team with each and every client.  We will not risk your home buying experience, your time and your money by being careless and full of haste.

Exception to the Un-reimbursed Expense Rule

Many tax payers file expenses related to their vehicle on their 2106 form.  Mortgage guidelines allow an Arizona Mortgage Lender to add back a portion of the expenses claimed for “business miles” put on a borrowers own vehicle.  As of 2012, we can add back $.23 per business mile claimed as a part of a mortgage applicants un-reimbursed business expenses.  This can help to offset/lower the overall expenses and help give the Arizona mortgage applicant more income.  I have personally used this calculation to squeak my clients into the approval range they are shooting for.

Example:
Gross Income: $85,000
Total un-reimbursed expenses: $10,00
Total business miles claimed by borrower: 20,000
Amount allowed to be added back for mileage: $4,600 (20,000 miles x’s $.23)
Net un-reimbursed expenses that lender has to deduct from borrowers income: $5,400 ($10,000 total – $4,600 mileage add back)

Total  Income that can be used to qualify for a new mortgage: $79,600 ($85,000 gross – $5,400 Net un-reimbursed business expenses)

At the end of the day, it is vital that you are working with an Arizona Mortgage Lender that understands how to navigate and interpret your tax returns.  It makes all the difference and will ensure your mortgage experience is one without costly surprises!  Call me today if you have any questions about your tax returns or to to pre-approved for an FHA, VA, Conventional, USDA or JUMBO home loan.

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By Jeremy House

 

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