Today, we’re going to kick off a 4 part series about what deductions a self-employed person can add back into their qualifying income from their tax returns. Each week, we will discuss
Tax Q's with Silverton Mortgage
Dated: February 15 2023
Today, we’re going to kick off a 4 part series about what deductions a self-employed person can add back into their qualifying income from their tax returns. Each week, we will discuss the different types of filings: Schedule C, Schedule E (for rental income), 1120, and 1065. We’re going to kick it off with the Schedule C.
Disclaimer: This newsletter is NOT tax advice. Silverton Mortgage always recommends you employ a tax expert or CPA for your filing needs. The purpose of this newsletter is to talk about what deductions can be added back to qualifying income, per Fannie Mae and Freddie Mac for the purposes of obtaining a mortgage. Please speak with a tax expert for advice on how to file.
A schedule C is the tax form many sole proprietors use. It is attached to the 1040 personal tax return. Below is an image of the form:
What does a mortgage professional look at to determine income?
Loans officers take an average of tax return earnings to determine income. Most often, a 2 year average is required. There will be times when Fannie Mae or Freddie Mac's findings will come back with the most current 1 year of taxes. Line 31 of the Schedule C shows the first line that we examine – Net Profit. This annual figure is averaged into a monthly calculation for the qualifying income figure.
As you can see, tax professionals often take deductions from a company’s gross profit to reduce the tax burden for their client. You can pay fewer taxes on your income, but the qualifying income will be lower for a mortgage, and you could end up not qualifying for as much as you’d like. Again we can only use the amount of income you pay taxes on, not the gross amount before all deductions.
There are a handful of deductions that can be added back into the qualifying income figure that are worth knowing for the Schedule C filer:
When it comes to real estate, Molly McGrory is the epitome of passion. With a career spanning over 28 years, Molly has grown RE/MAX Town & Country from a small office with just a handful of agents to ....
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