S Corp: How to Use Self-Employment Income to Buy a Home

Self Employed Income Calculation for an S Corp, The how to Guide

When Calculating income for a self-employed individual first, we 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.  First is your C Corp, for me this is the rarest form and the most difficult to calculate self-employed income, there are more qualifiers to use this income type and this business structure files an 1120 Corporate Income Tax Return.  Second are your S Corp self-employed, a more common type of Corporation for all business types, this business structure allows for several partners and the income is filed on an 1120S US income Tax Return for an S Corporation.  Thirdly are your Limited Liability Companies another more common type of self-employed business structure and utilized by many real estate investors this business structure files a 1065 US Return of Partnership Income.  Finally, are your Sole Proprietors, as the name implies there is one owner and they pay taxes based on the company’s profit as income and this business structure files a 1040 US Individual Income Tax Return with a completed schedule C.  This blog is going to cover the calculation of Income for the second business structure mentioned above, S Corps.

When calculating income from this type of business structure, we don’t just take the net number and call it a day, we utilize every part of the return from the K1 to any W2 income you pay yourself and the associated paystubs.  In this blog you will learn how to utilize all the expense that are added back into your income and limit the expenses that we deduct from your income.  The 1120S US income Tax Return for an S Corporation is a fairly easy document to understand once you are familiar with it, you will be able maximize your borrowing power and limit your tax liability.  Google 1120S US income Tax Return for an S Corporation to view the document in its entirety or go to our Blink Lending TV YouTube page https://www.youtube.com/channel/UCkGSWgSMLOB4SGoC6vXm3jg

When calculating income from an S Corporation we first need to identify the parts of the tax return.  S Corp business structures are comprised of a K1 and the official 1120S US income Tax Return for an S Corporation, like your 1040 tax return this return has schedules starting with Schedule B then Schedule K & Schedule L followed by the final schedules M1 & M2 there are also several statements prepared by your preparer that are usually the last pages of your return. 

When calculating this income, we start with the K1, this document will tell us your S Corp’s net profit or loss plus it identifies any guaranteed payments and your percent of ownership from 0% to 100%.  After we analyze your K1 we move over to your actual 1120s Tax return, first we start with lines 4 & 5 nonrecurring income & loss if the number on this line is positive we deduct it from your income and if it is a negative number then we get to add it back to your income because the number wont be there next year. The next line we look for is line 14 comprised of 2 parts depreciation and form 8825 depreciation any amount on these lines gets added back to your income.  The next line 15 is your depletion and we also add this amount back to your income. The final item from page 1 is line 19 expenses and usually accompanying this number is a statement attached to the back of your tax return and if that statement has a line item for amortization, then we get to add that number back as well.  From there we head over to Schedule L line 17 column d and any number reported as mortgages or notes payable will be deducted from your income unless we can prove that it is there every year or if the cash line item reported on Line1 column d is greater than the amount on line 17 column d.  Finally, to cap off the calculation we shift over to Schedule M1 line 3b and deduct that from your income.  Once theses numbers are compiled, we have your usable income.

	Dollar Value
K1 LINE 1, 2, & 3
Deduct nonrecurring income/add nonrecurring loss LINE 4 & 5
Depreciation LINE 14 & Form 8825
Depletion LINE 15
Amoritization/Casualty Loss LINE 19 from the attached Statement
Mortgages or Notes payable in less than 1 yr Schedule L LINE 17 Column d
Travel & Entertainment Exclusion Schedule M-1 line 3 b
Multiplied by your percentage of ownership
Subtotal usable Income