Lenders rebuild a self-employed borrower's income from the tax return before they qualify it. Non-cash deductions such as depreciation come back, one-time items come out, and the result is averaged over two years unless it is falling. This calculator runs that math for Schedule C, Schedule E, S corporation, partnership, and C corporation income, in your browser, with nothing saved.
Five short steps with your last two returns in front of you. Nothing is saved.
The IRS taxes what is left after every deduction. The lender wants to know what cash the business threw off.
Lenders start from the tax return and rebuild the income. Non-cash deductions such as depreciation are added back, because the truck was paid for in an earlier year and the deduction cost nothing this year. One-time items are pulled out in both directions. Then the two most recent years are averaged, unless the latest year is lower, in which case the lender uses the lower year and asks why. The rules live in Fannie Mae's Selling Guide, section B3-3.2-01, and the worksheet most underwriters use is Fannie Mae Form 1084.
Most borrowers get good news here, because aggressive depreciation that cut the tax bill comes back for qualifying purposes. The bad news is a declining year, which erases the average.
The same idea, applied to different forms.
Start with line 31, net profit or loss
Add back line 13, depreciation, and line 12, depletion
Add back the business use of home on line 30
Remove one-time income; add back one-time expenses
Average the two years, unless the latest year fell
Start with W-2 wages paid to you by the company
Add your share of ordinary income, K-1 box 1
Add back depreciation, depletion, and amortization at your ownership share
Subtract mortgages and notes payable within a year
Confirm the company can distribute the earnings: current assets against current liabilities
Start with ordinary business income, K-1 box 1
Add guaranteed payments, K-1 box 4
Add net rental income, K-1 box 2
Add back depreciation and depletion at your ownership share
Run the same liquidity test as an S corporation
Start with each property's net income or loss, line 21
Add back depreciation, line 18
Add back mortgage interest, taxes, insurance, and HOA dues, because the lender counts the full payment as a debt instead
Total across properties
For S corporations and partnerships, Fannie Mae only counts K-1 income that was distributed or that the business could have distributed. The Selling Guide (B3-3.4-02) accepts a quick ratio or current ratio of 1.0 or better as evidence of that liquidity, and it subtracts mortgages, notes, and bonds payable in less than one year unless they roll over regularly. The calculator runs the ratio test; the short-term debt adjustment is a conversation with your underwriter.
Add-backs are deductions that took no cash this year.
| Deduction | Added back? | Why |
|---|---|---|
| Depreciation | Yes | Non-cash. The asset was paid for in an earlier year. |
| Depletion | Yes | Non-cash. |
| Amortization | Yes | Non-cash. |
| Business use of home | Yes | The home cost is counted through your mortgage payment instead. |
| Casualty losses | Yes, once | One-time event, added back when documented. |
| Vehicle depreciation inside the mileage rate | Partly | Only the depreciation portion, and only for miles reported on Schedule C Part IV. |
| Meals and entertainment | No | Real spending. Fannie Mae subtracts the non-deductible portion. |
| Utilities, insurance, contractor payments | No | Real business expenses. |
Conventional, FHA, SBA, and bank statement programs all take it. They differ on history and documentation.
Two years of self-employment history is the norm. One year can work when the prior year in the same field paid at least as much. Full returns with all schedules.
Two years of self-employment, or one year plus two years in the same line of work before that. Looser credit and down payment rules than conventional.
Same add-back logic, plus SBA eligibility: for-profit, U.S. based, within size standards, and the ability to repay shown through debt service coverage.
12 to 24 months of deposits instead of tax returns. Higher rates, but useful when aggressive write-offs leave the return understating what the business earns.
Four that show up in files again and again.
The standard mileage rate includes a depreciation component that can be added back, but only when the miles appear on Schedule C Part IV.
When the latest year is lower, lenders use the latest year and ask why. The calculator switches to 12 months when the drop is more than 10%.
Lenders trace cash flow from the business. With commingled accounts the underwriter sorts personal from business deposits line by line, and every unexplained deposit becomes a question.
K-1 income only counts if the company could have paid it out. A quick ratio under 1.0 can knock out income that shows on the K-1.
Once you know the monthly figure, the next thing a lender asks for is a personal financial statement: assets, liabilities, and the income you calculated above, signed. StatementsReady builds it from synced balances in about 8 minutes, as a PDF or SBA Form 413. Garrett Pierson is the founder of StatementsReady and a licensed commercial real estate agent in Utah. He owns commercial property himself, so he fills out the same lender paperwork he writes about.
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