The Bank I work for has a loan to a disengaged business. The 100% owner of the business is also a guarantor on the loan. The rents and expenses of this office building securing this loan, is now included on the owner’s tax return on Schedule E-Supplemental Income and Loss. Considering the guidelines below on reporting income for small business loans should we:
A) Report the income of the building, that is included in the owner’s tax return as supplemental income
B) Report the owner’s entire income for this loan-my intuition says no because he is a guarantor and not considered a subsidiary or affiliate of this business.
C) Report the income as a Code 3-Unknown/NA

Generally, an institution should rely on the revenues that it considered in making its credit decision when indicating whether a small business or small farm borrower had gross annual revenues of $1 million or less. For example, in the case of affiliated businesses, such as a parent corporation and its subsidiary, if the institution considered the revenues of the entity’s parent or a subsidiary corporation of the parent as well, then the institution would aggregate the revenues of both corporations to determine whether the revenues are $1 million or less. Alternatively, if the institution considered the revenues of only the entity to which the loan is actually extended, the institution should rely solely upon whether gross annual revenues are above or below $1 million for that entity.
However, if the institution considered and relied on revenues or income of a cosigner or guarantor that is not an affiliate of the borrower, such as a sole proprietor, it should not adjust the borrower’s revenues for reporting purposes.

The loan officer and staff believe that the owner’s income should be reported for this loan because they now regard the owner as an affiliate of the business. I disagree and would either consider option A or C above as the solution.

By disengaged, do you mean a disregarded entity for tax purposes...the income passes through to the owners? I am going to assume that is what you mean since I have no idea what a disengaged business would be.

I would report the gross revenues of the LLC from the office building that passed through to the owner's schedule E.

Let me add that if the business has multiple owners (such as multiple members of an LLC) in a disregarded entity, you want the total gross revenue for the business itself, not the net on which members are taxed. Total gross rental in an income producing property situation.

I did mean disregarded entity.

Thanks so much for your help!

Just wanted to follow up on part of the answer above. In dealing with someone with multiple companies how far do we cast our net to aggregate revenues?

Under the following scenario what revenue do we report?

Borrowing LLC has $500,000 in revenue. This LLC is owned 100% by guarantor A. Guarantor A also owns 20% of a partnership with $750,000 in revenues.

Since we gathered financials on both the LLC and partnership it indicates that we are considering both in the credit decision. But our guarantor does not have a controlling interest in the partnership and it is not the primary source of his income. I assume we count revenues of $1,250,000 for CRA purposes. Or am I wrong and we count none or part of the $750,000?