How to Calculate Self-Employed Income for a Sole Proprietor
This is always a hot topic of conversation, so let us walk you through it. When calculating income for a self-employed individual, we first need to determine what type of self-employed they are exactly; the typical self-employed person will fall into one of these 4 business structures.
C Corp
First is your C Corp, which is the most rare form and the most difficult to calculate self-employed income. There are more qualifiers to use this income type and these folks file an 1120 Corporate Income Tax Return.
S Corp
Are you S Corp self-employed? This is a more common type of Corporation for all business types, and these folks can have several partners. The income is filed on an 1120S US income Tax Return for an S Corporation.
Limited Liability Company or LLC
Are you a Limited Liability Companies? This is another more common type of self employed and utilized by many real estate investors. These companies file a 1065 US Return of Partnership Income.
Sole Proprietor
Or, are you a Sole Proprietors? Just as the name implies, there is one owner and they pay taxes based on the companies profit as income and they file a 1040 US Individual Income Tax Return with a completed schedule C. This is the income that we will calculate below.
When calculating this income, you need to know that we don’t just take the net number and call it a day. This is why the type and amount of expenses you file are incredibly important because some of them you add to the net number and some of them you deduct from the net number.
In this blog you will be able to utilize all the expenses that are added back into your income and limit the expenses that we deduct from your income. The Schedule C is a fairly easy document to understand and once you are familiar with it, you will be able to maximize your borrowing power and your tax liability.
Google 1040 US Individual Income Tax Return Schedule C to view the document in its entirety or go to our Blink Lending TV YouTube page to learn more.
On your Schedule C Form your Gross Income is reported on Line 1, which we don’t use at all in our calculations, instead we start with Line 31, which is your net income.
Then we add or subtract Line 6 Other Income (nonrecurring income). If this number is positive then we deduct it because it won’t be there next year, and if it is a loss, we add it back because it wont be there next year.
The next two expenses are both added back to your income because they are considered noncash losses, and these are reported on Lines 12 & 13, depreciation & depletion.
After that we go to line 24b Deductible Meals & Entertainment, with this number we actually deduct it from your net income because you can only write off half of the meals & entertainment, and we need to account for the other half of the expense.
Although presently I believe you are allowed to write off 100% of this number, we are still having to deduct it so that may pose an issue on your 2020 tax return. The two following expenses are both added back to your income because they are considered noncash losses first is Line 30 Business Use Of Home. The second expense is on page 2 and reported on line 44a in part IV.
This number is a little more difficult, but you start by multiplying the number reported on Line 44a by $0.26 for 2019 and $0.27 for 2020. Finally we add back any amortization reported on page 2 part V, and this will get you a usable income for mortgage lending purposes.
There are a few other deductions that we can add back to your income, but most loan officers are unaware that this can be done. First, we can start with your automobile payments reported on the credit report. These can be exempted from your debt to income (DTI) if we can show 12 consecutive on-time payments from your business account AND the payments are expensed on line 9 of your Schedule C.
Also, there are some onetime expenses that can be exempt when proven to be a onetime expense; these will vary from business to business. Also keep in mind, if you have business credit cards that are reported to your personal credit report we can exempt them from your DTI when we can show 12 consecutive on-time payments from your business account and the debts are reported on your Schedule C.
| Dollar Value | |
| Line 31 | |
| Deduct nonrecurring income/add nonrecurring loss or expense: LINE 6 | |
| Depletion LINE 12 | |
| Depreciation LINE 13 | |
| Meals or Meals & Entertainment Exclusion LINE 24b | |
| Business Use of Home LINE 30 | |
| Business Miles: page 2, part IV, LINE 44a x Depreciation Rate 2020: $0.27, 2019: $0.26, 2018: $0.25 | |
| Amortization/Casualty Loss (only if noted) | |
| Subtotal usable Income |
Give us the Blink Lending team a call at 713.462.5465 to set up a meeting if you want to go through this in more detail. We understand it can be confusing and that’s why our entire team is here to help.
