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What are Un-reimbursed Business Expenses and How Can They Affect me?

Un-reimbursed Business Expenses (URBE) can have a huge impact on whether you get approved for a mortgage loan. Unfortunately, many people do not know what they are and the negative impact they can have. I refer to them as the silent killer in the loan approval process. URBE are deductions that people claim on their tax returns to lower their adjusted gross income.  They are listed on the Schedule A form along with all of your other itemized deductions such as mortgage interest, charitable contributions, medical expenses, etc.  URBE are filed on a separate 2106 form and are included in your 1040 tax return that is reported to the IRS.  URBE are occupational expenses that are not reimbursed by the employer.  These expenses can include, but are not limited to: car mileage, purchasing office equipment, cell phone, computer, meals, travel, uniforms, etc.  Most salaried or W2 employees are typically provided with many of these basic items or are reimbursed by their employer so there is usually not a need to claim these expenses as deductions.  For example, if you are a W2 employee working in outside sales, your company may provide you with a cell phone or car allowance and pay for any travel required.  However, if someone is a sub-contractor and their income is reported on a 1099 form then their employer most likely does not cover these items as part of their pay. Therefore, the sub-contractor can deduct these expenses on their tax return. It makes sense to allow this because if a W2 sales employee made $100k in a year and incurred no business expenses but yet a 1099 sub-contractor also made $100k but had to incur $25k in business expenses to achieve that $100k then it would not be fair to tax them on the same $100k when the sub-contractor really made $75k.

The main issue with URBE is that these deductions are subtracted directly from a borrower’s gross income. This lowers the amount of income used to qualify for a loan.  Another issue is that many W2 employees will play in the gray area when it comes to deductions in order to offset what they have to pay in taxes to the IRS.  For example, some people may write off mileage on their car when it was not necessarily a business related expense and may do the same for travel or meals.  This gamble may provide a short-term benefit in the amount they pay in taxes but could end up hindering their chances of getting approved to buy a home.  Any large URBE that are being claimed by a W2 employee can also be a red flag to the IRS and may trigger an audit.  Personally, I have worked with six clients over the last 60 days who were unable to qualify for a mortgage loan because of URBE and they were all W2 employees.  The best thing you can do is consult with your CPA or accountant.  If you are in the market to buy a home soon then let your CPA or accountant know and inform them that any URBE that you claim will be counted against your income.  Not all accountants or CPAs know the negative impact that these URBE can have on your chance of getting approved for a mortgage loan. It is best to be informed so you can make the right decision.

If you have any questions about this topic please do not hesitate to contact me. To learn more about our company and mortgage products, please feel free to call Dan Longman, President of Priority Lending Corp, at 954-438-3776 ext.11 or email me at prioritydan@bellsouth.net. Visit us online at www.prioritylendingcorp.com 

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