self employment and banks

[visual800]

I have been in same home for 35 years, paid for. All vehicles paid for. No debt no overhead, been in business for 35 years. Great credit score. Money in bank and I am very grateful for that.

NONE of it matters! Am building a new home in the country on 4 acres, the 4 acres is paid for. I have already got $135k in the home that is framed and roofed and slab poured. My bank will not offer any money for a construction loan, LOL...WTF! Due to my tax records (which I am proud of thanks to my cpa) my bank will not loan any money to me for this project. I said "OK, thats fine, I understand , can I get a HELOC on my personal propoerty that is paid for?.....NOPE! Banks no longer want anything to do with land or homes.

2007 housing crash ruined everything. Which is the way it should be. If you cant afford a new home you shouldnt have one. This post is not about poor pitiful me cant get my bank to loan me money its more about things Ive learned from this. Credit scores no longer mean a damn thing and your "paid for" property doesnt mean sh@t either. Self employment is a double edged sword. Due to us having write offs and doing what we are allowed to do does nothing but hurt us in the end.

The IRS wants to know your GROSS to figure out taxes, lending institutions want your NET to loan you money. It would seem to me that banks could somehow "understand" how self employed taxes are done but I really dont think they have a clue OR they dont care since a lot of bank got hammenered when the housing market crashed.

Anywho just venting. I guesss being in the same home for 35 years I was unaware of whats going on out thewre in the real world. I wonder how the hell some folks get loans to start businesses these days!

 

[ikarasu]

Did you properly declare your taxes?

I'm in Canada so it's a bit different... But even if you're self employed, they use your past xx years of income and average it out. I'm surprised your bank doesn't see you make xx every year for the past 5 years and isn't willing to use that figure.

It's kind of shitty and people take advantage of it. If you're buying a 1.3 million house you can't afford... You tell the bank you're going to be renting the downstairs of the house out for 2k a month.... And they have to count that income as your own income and put it towards the mortgage. So we have a lot of over leveraged, house poor people over here.... And it's driven up the price of homes a lot, can't get a townhouse for under 800k now... Most homes are 1-1.3 million for 2000 sqft or under.... Average decent sized house is 1.6-2 million... It's crazy.

Good luck finding a loan though! Have you tried a credit union? They may be less picky about self employment

 

[victor bogdanov]

Has nothing to do with self employment. just not enough income for the formula the bank is using to underwrite the loan

 

[netsol]

visual800 should be talking to a mortgage broker.
things are much more complicated than they were even a few years ago.
biden & the democrats hate the idea of self employment

 

[WildWestDesigns]

biden & the democrats hate the idea of self employment

They hate self sufficiency. Much harder to control. But I digress.

Has nothing to do with self employment. just not enough income for the formula the bank is using to underwrite the loan

Just can't do that NINA/NINJA loan anymore.

 

[Notarealsignguy]

Construction loans are known for being difficult and stringent. After 35 years you should know a bank uses income tax returns to qualify small business owners on loans, ,it's good reason to be honest on your taxes.

 

[Texas_Signmaker]

Victor is right. I've bought 3 houses in the last 5 years... On my first one, I had to watch the deductions to make sure my net was above the threshold for the house I wanted to buy. You need to have the mortgage 33% of what your annual income is. The other two I didn't have an issue with that threshold. Just provided the income tax returns and bank statements. If you have the income to support the payment it's not an issue. Plus having 20% down takes some risk off the table for the lender. You have 20% and 33% debt to income ratio you won't have a problem.

Ikarasu, in USA it's only two years of returns. Thing is, self employed can write off a lot of things... like cell phone, car, home office, health insurance... those things W2 employees can't write off. What he's saying is he writes those off but since w2 can't.. it shouldn't be counted against him. I had to take the hit and limit my deductions for two years... but once you get the mortgage you do whatever you want. I assume construction loans are more difficult than a tract home in a suburb that's easy to appraise and resell.

 

[victor bogdanov]

Thing is, self employed can write off a lot of things... like cell phone, car, home office, health insurance... those things W2 employees can't write off. What he's saying is he writes those off but since w2 can't.. it shouldn't be counted against him.

It's all a write off until the IRS audits, like cell phone for example. If it is a separate line used exclusively for business then yes its a write off 100% but then ofcouse you have a separate phone bill. But if it is is your only phone line used for personal and business purposes then it is not a 100% write off. Lots of gray area dedications like this.

All of these small gray area deductions should be a small % of the total revenue that you are deducting the expenses from and won't really affect the total taxable income too much.

It is easy to make your income higher than it is when self employed by leaving out a few expenses and paying a little more tax if you plan on needing loans in the near future


I try to stock up on as much material as possible, pay/prepay any bills in December to lower taxable income or at least kick the can till next year. 2024 is be the first year when I did not buy any expensive equipment so that's going to be painful come April

 

[Texas_Signmaker]

It's all a write off until the IRS audits, like cell phone for example. If it is a separate line used exclusively for business then yes its a write off 100% but then ofcouse you have a separate phone bill. But if it is is your only phone line used for personal and business purposes then it is not a 100% write off. Lots of gray area dedications like this.

All of these small gray area deductions should be a small % of the total revenue that you are deducting the expenses from and won't really affect the total taxable income too much.

It is easy to make your income higher than it is when self employed by leaving out a few expenses and paying a little more tax if you plan on needing loans in the near future


I try to stock up on as much material as possible, pay/prepay any bills in December to lower taxable income or at least kick the can till next year. 2024 is be the first year when I did not buy any expensive equipment so that's going to be painful come April

Same here... My sales were flat but didn't do any major purchases so income went up quite a bit. Also had some outstanding invoices from 2023 not get paid till this year so double whammy.

 

[Tomtint]

A long time ago my father told me " Banks will never lend you money when you NEED it " I never really understood that until that day came for me back 15 years ago.. but that's another story. To tho O.P, what I can tell you is that banks look at debt to income for a home loan and if it's a second home and not owner occupied as a primary residence., it gets even more difficult.

What you could do, is open another LLC that's a land holding /development entity and then transfer the land and building to that entity. Then apply for the construction loan through the LLC where the bank will look at it as a loan to value instead of debt to income situation.
There will be a few other hurdles like having a licensed builder signed on , a construction budget submitted. Property appraisal. Builders risk policy in place etc.

 

[ikarasu]

I write off a ton for my home business. Got my first printer... 6? Years ago. I get to write off 1/3 of my house... Bills, etc, it's nice. I think for the first 3 years I was always at a negative since I kept buying more and more equipment. Now I have about 80k worth of equipment in my house, all paid off for sadly it means much less in deductions....

First 3 years my self employed income was seen at a zero, since even though I grossed a lot.... All the write offs made it a net break even pretty much. Which I get... Who cares if you make a million dollars if you have to spend a million... If anything that tells the bank you're not good at managing money, so I get why it doesn't secure a loan.


The housing market here is crazy. 6 years ago I paid 520k for my townhouse, and in the past 2 months, 2 of my neighbours sold for 1-1.1 million.


If I were you, I wouldn't give up though - goto a mortgage broker - they can submit your application to dozens of banks, credit unions, etc and will likely be able to find one that will work with you. The bank I mortgaged my place through didn't want to give me a HELOC.m even though I've had a mortgage with them for 20 years. I have 380k out of 520k paid off... But I applied for it right after a printer purchase, so I was "$20k in debt".... Which is stupid, considering what a HELOC is. Went to a mortgage broker as our mortgage was up for renewal and switched to a different bank and got the HELOC. Sometimes the banks just have too much invested, or for some reason see it as a high risk when it doesnt make sense.

 

[visual800]

also think of this they went back past 2 years and that bout when COVID was happening....Not a chance in hell. As I mentioned I have damn good cpa and why not keep most of my own money, it seems like the govt doesnt know how to manage money very well, lol

 

[Texas_Signmaker]

All the banks here have same rules. The mortgages all need to conform so they can be sold to gvt

 

[UpAndPrinting]

I wish I had more to contribute to this post. But I wanted to comment and say this is all very helpful information for people in our industry, myself included. I started UAP literally a year ago yesterday and I'm trying to absorb as much information as possible to make business as smooth for us as I try to make it for you guys. We should create a post to help other people in our industry on how to file appropriately.

 

[kcollinsdesign]

Unless you have assets to put up for collateral you can not get a commercial loan to start a business.

I spent the first five years living off my wife's income and renting an apartment. Things were tight but I was dumb and we were in love. It was five years of living and breathing the business until I was actually drawing a pay check.

I actually would not recommend this. It makes much more sense to just get a regular job. In the beginning most of my employees were making more than I was. It is easy to fall into the expense trap, not pay into social security, and get a late start accumulating personal wealth and saving for retirement. Because of changes in the industry, my very profitable and successful sign business wasn't worth as much you would expect when I sold it. I did OK, but I would have been better off collecting a pay check and investing in a retirement account from the very beginning! And that does not take into account years of 60 – 70 hour work weeks and missing spending time with my family and friends.

If you have family money or somehow have accumulated enough money to start a business, I would (cautiously) recommend it for a person with a entreprenurial spirit and is willing/able to take chances. Otherwise, you will probably be better off just getting a job!

 

[Notarealsignguy]

also think of this they went back past 2 years and that bout when COVID was happening....Not a chance in hell. As I mentioned I have damn good cpa and why not keep most of my own money, it seems like the govt doesnt know how to manage money very well, lol

If you don't qualify then you don't qualify. I don't understand your bellyaching here, you say all is good but then bitch that the bank looked at covid numbers which were bad. Sounds like they are doing their job to me and you're not telling the whole story.
Be honest here, you can only write off so much and the banks know that all business owners get their income down as low as possible , you're not doing mind blowing stuff. If your tax returns show low income then that is exactly what ya got ,write offs or not. AFAIK, C-Corps have retained earnings which are not taxed so comparing their 0 income to yours is a false equivalency.

 

[visual800]

If you don't qualify then you don't qualify. I don't understand your bellyaching here, you say all is good but then bitch that the bank looked at covid numbers which were bad. Sounds like they are doing their job to me and you're not telling the whole story.
Be honest here, you can only write off so much and the banks know that all business owners get their income down as low as possible , you're not doing mind blowing stuff. If your tax returns show low income then that is exactly what ya got ,write offs or not. AFAIK, C-Corps have retained earnings which are not taxed so comparing their 0 income to yours is a false equivalency.

what whole story? wth are you talking about? Im saying what I know

 

[Notarealsignguy]

what whole story? wth are you talking about? Im saying what I know

Me too.
You: The IRS wants to know your GROSS to figure out taxes, lending institutions want your NET to loan you money. It would seem to me that banks could somehow "understand" how self employed taxes are done but I really dont think they have a clue OR they dont care since a lot of bank got hammenered when the housing market crashed.

Also You: also think of this they went back past 2 years and that bout when COVID was happening

You failed their stress test because your numbers were not good enough. Are they supposed to ignore bad years you had like there will never be another? Also, why would the bank care what your gross income was, it means nothing.

 

[Tomtint]

Unless you have assets to put up for collateral you can not get a commercial loan to start a business.

I spent the first five years living off my wife's income and renting an apartment. Things were tight but I was dumb and we were in love. It was five years of living and breathing the business until I was actually drawing a pay check.

I actually would not recommend this. It makes much more sense to just get a regular job. In the beginning most of my employees were making more than I was. It is easy to fall into the expense trap, not pay into social security, and get a late start accumulating personal wealth and saving for retirement. Because of changes in the industry, my very profitable and successful sign business wasn't worth as much you would expect when I sold it. I did OK, but I would have been better off collecting a pay check and investing in a retirement account from the very beginning! And that does not take into account years of 60 – 70 hour work weeks and missing spending time with my family and friends.

If you have family money or somehow have accumulated enough money to start a business, I would (cautiously) recommend it for a person with a entreprenurial spirit and is willing/able to take chances. Otherwise, you will probably be better off just getting a job!

Getting a commercial loan isn't that difficult provided you have the docs the banks are looking for.. Starting with a business plan. In many cases a bang will make you P.G. a business loan if you are just starting out.

 

[netsol]

I write off a ton for my home business. Got my first printer... 6? Years ago. I get to write off 1/3 of my house... Bills, etc, it's nice. I think for the first 3 years I was always at a negative since I kept buying more and more equipment. Now I have about 80k worth of equipment in my house, all paid off for sadly it means much less in deductions....

First 3 years my self employed income was seen at a zero, since even though I grossed a lot.... All the write offs made it a net break even pretty much. Which I get... Who cares if you make a million dollars if you have to spend a million... If anything that tells the bank you're not good at managing money, so I get why it doesn't secure a loan.


The housing market here is crazy. 6 years ago I paid 520k for my townhouse, and in the past 2 months, 2 of my neighbours sold for 1-1.1 million.


If I were you, I wouldn't give up though - goto a mortgage broker - they can submit your application to dozens of banks, credit unions, etc and will likely be able to find one that will work with you. The bank I mortgaged my place through didn't want to give me a HELOC.m even though I've had a mortgage with them for 20 years. I have 380k out of 520k paid off... But I applied for it right after a printer purchase, so I was "$20k in debt".... Which is stupid, considering what a HELOC is. Went to a mortgage broker as our mortgage was up for renewal and switched to a different bank and got the HELOC. Sometimes the banks just have too much invested, or for some reason see it as a high risk when it doesnt make sense.

much of my consulting business is for realtors & mortgage brokers.

I wish I had more to contribute to this post. But I wanted to comment and say this is all very helpful information for people in our industry, myself included. I started UAP literally a year ago yesterday and I'm trying to absorb as much information as possible to make business as smooth for us as I try to make it for you guys. We should create a post to help other people in our industry on how to file appropriately.

you need to find a GOOD cpa. tax code is too complicated to take well meaning advice from ANY of us. the cpa can help you build a long term strategy for growth.

in theory, the next 4 years will be easy, but, the democrats will get back in power at some point and approach you with the feeling that, because you have your own business, they have caught you at something