Let Molly Move You!

Tax Q's with Silverton Mortgage

Dated: February 15 2023

Views: 300

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.
Schedule C
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.
Deductions
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:
  • Business Mileage (Line 44a) – Currently, we can give back 28 cents per mile driven that is filed on a tax return. If your business takes you on the road a lot, this is definitely a deduction that can help generate more qualifying income. 
  • Depletion (Line 12) – This is defined as the “using up of natural resources by mining, quarrying, drilling or felling”. If your business qualifies for that type of deduction, it may be worth considering.
  • Depreciation (Line 13) – Defined as the “measurement of the useful life of a business asset”. 
Blog author image

Molly McGrory

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 ....

Latest Blog Posts

Tax Q's with Silverton Mortgage

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

Read More

VA LOAN MYTH BUSTERS

We are exploring VA loan myth busters this month:Myth: VA Loans have a ton of red tape and take forever to close.Fact: On average, VA loans take around the same amount of time to close as

Read More

2022 In Review

Today, we're going touch on a few of the major stories in our industry as a 2022 year in review.Interest Rates The dominant story in the mortgage world in 2022 was rising interest rates. 

Read More