source:
  type: guide
  id: fnma-sel-b3-3.7-01
  authority: Fannie Mae Selling Guide B3-3.7-01 — Analyzing Partnership Returns for
    a Partnership or LLC
  description: Fannie Mae Selling Guide B3-3.7-01 — Analyzing Partnership Returns
    for a Partnership or LLC.
  coverage_tier: operative
obligations:
- id: fnma-sel-b3-3.7-01-full
  canonical_id: fnma-sel-b3-3.7-01-full
  section: Fannie Mae Selling Guide B3-3.7-01 — Analyzing Partnership Returns for
    a Partnership or LLC
  type: do
  tags:
  - regulator-direct
  - fnma
  - selling-guide
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: Fannie Mae Selling Guide B3-3.7-01 — Analyzing Partnership Returns
      for a Partnership or LLC
    source_class: fnma-guide
    source_url: https://singlefamily.fanniemae.com/media/document/pdf/selling-guide
    snapshot_id: 5f7b8b79da595d76
    fetched_at: '2026-05-25T14:09:57Z'
    content_hash: sha256:98cf85a02861bbe84914a0e339b327c8fc131869a8a573882007bbeea60c5701
    paragraph_quote: 'B3-3.7-01, Analyzing Partnership Returns for a Partnership or
      LLC (02/07/2024) Introduction This topic contains information on analyzing partnership
      returns for a partnership or LLC, including: Overview Evaluating the Business
      Income Borrower’s Proportionate Share of Income or Loss Adjustments to Business
      Cash Flow Published May 6, 2026 382 Income from Partnerships, LLCs, Estates,
      and Trusts Overview Partnerships and some LLCs use IRS Form 1065 for ﬁling informational
      federal income tax returns for the partnership or LLC. The partner’s or member-owner’s
      share of income (or loss) is carried over to IRS Form 1040, Schedule E. See
      B3-3.5-02, Business Structures, for more information on partnerships and LLCs.
      A borrower with an ownership interest in a partnership or LLC may receive income
      in the form of wages or other compensation from the partnership or LLC in addition
      to the borrower’s proportionate share of income (or loss) reported on the Schedule
      K-1. Evaluating the Business Income When the borrower has 25% or more ownership
      interest in the business and business tax returns are required, the lender must
      perform a business cash ﬂow analysis and evaluate the overall ﬁnancial position
      of the borrower’s business to determine whether income is stable and consistent,
      and sales and earnings trends are positive. If the business does not meet these
      standards, business income cannot be used to qualify the borrower. Borrower’s
      Proportionate Share of Income or Loss The borrower’s proportionate share of
      income or loss is based on the borrower’s partnership percentage of Ending Capital
      in the business as shown on IRS Form 1065, Schedule K-1. The lender can only
      consider the borrower’s proportionate share of the business income or loss after
      making the adjustments to the business cash ﬂow analysis discussed below. Adjustments
      to Business Cash Flow Items that can be added back to the business cash ﬂow
      include depreciation, depletion, amortization, casualty losses, and other losses
      that are not consistent and recurring. The following items should be subtracted
      from the business cash ﬂow: travel and meals exclusion, other reported income
      that is not consistent and recurring, and the total amount of obligations on
      mortgages, notes, or bonds that are payable in less than one year. These adjustments
      are not required for lines of credit or if there is evidence that these obligations
      roll over Published May 6, 2026 383 regularly and/or the business has suﬃcient
      liquid assets to cover them. Income from Partnerships, LLCs, Estates, and Trusts
      Income from partnerships, LLCs, estates, or trusts can only be considered if
      the lender obtains documentation verifying that the income was actually distributed
      to the borrower consistent with the level of business income reﬂected on Schedule
      K-1, or the business has adequate liquidity to support the withdrawal of earnings.
      The lender may use discretion in selecting the method to conﬁrm that the business
      has adequate liquidity to support the withdrawal of earnings. When business
      tax returns are provided, for example, the lender may calculate a ratio using
      a generally accepted formula that measures business liquidity by deriving the
      proportion of current assets available to meet current liabilities. It is important
      that the lender select a business liquidity formula based on how the business
      operates. For example: The Quick Ratio (also known as the Acid Test Ratio) is
      appropriate for businesses that rely heavily on inventory to generate income.
      This test excludes inventory from current assets in calculating the proportion
      of current assets available to meet current liabilities. Quick Ratio = (current
      assets — inventory) ÷ current liabilities The Current Ratio (also known as the
      Working Capital Ratio) may be more appropriate for businesses not relying on
      inventory to generate income. Current Ratio = current assets ÷ current liabilities
      While a result of one or greater is generally suﬃcient to conﬁrm adequate business
      liquidity to support the withdrawal of earnings, lenders may support adequate
      liquidity using alternative methods with a documented rationale. Recent Related
      Announcements The table below provides references to recently issued Announcements
      that are related to this topic. Announcements Issue Date Announcement SEL-2024-01
      February 07, 2024 Announcement SEL-2019-05 June 05, 2019 Published May 6, 2026
      384'
  judgment: false
