# Self-Employment Income

## Self-Employed Analysis

Business tax returns are either done on the IRS Form 1065 (for Partnerships and LLC), IRS Form 1120S (for S Corporations and LLC-S), or Form 1120 (for C Corporations). Typically, but not always, a two-year average is required when calculating Qualifying Income for self-employed individuals.

## Calculate Self-Employed Income

The formulas below are guidelines and are intended to provide an understanding of how the mortgage industry calculates qualifying income so you can roughly Calculate Your Debt To Income. Calculating the true qualifying income isn’t this cut and dry and you should call us with questions. Don’t approve (or deny) yourself based on your own calculations – there are a myriad of other factors that are considered beyond the formulas below when calculating income. Let us do the work before you move forward.

### K-1 Income

A K-1 form is like the business person’s W2. A K1 shows money paid to someone from the business AND show the percentage of ownership that the person owns. When figuring the total qualifying income you’ll need to enter any losses as negative numbers.

+ Ordinary Income (Box 1)

+ Net Rental Real Estate / Other Net Income (Box 2)

+ Guaranteed Payments to Partner (Form 1065)

= Total Qualifying Income

### Partnership & LLC – Form 1065 or 1120S

1065 and 1120S are business tax returns are for Partnerships and LLCs. We will require all pages of these tax returns if someone on the loan owns 25% or more of this business. When figuring the total qualifying income you’ll need to enter any losses as negative numbers.

Ordinary Income (or Loss) from Other Partnerships (1065 Line 4)

+/- Nonrecurring Other Income (or Loss) (1065 Line 7, 1120S Line 5)

+ Depreciation (1065 Line 16c, 1120s Line 14)

+ Depletion (1065 Line 17, 1120s Line 15)

– Mortgages, Notes, Bond payable in less than 1 year (1065 Schedule L Line 16, 1120s Schedule L Line 17)

– Non-deductible Travel & Entertainment (1065 Schedule M-1 Line 4b, 1120s Schedule M-1 Line 3b)

= Sub Total

x Percentage of Ownership (Line D of K-1)

= Total Qualifying Income

### C Corporation – Form 1120

1120 business tax returns are for C Corporations. We will require all pages of these tax returns if someone on the loan owns 25% or more of this business. When figuring the total qualifying income you’ll need to enter any losses as negative numbers.

Example: Calculating Schedule 1120 Business Income

Taxable income (Line 30)

– Total Tax (Line 31)

+/- Nonrecurring Other Income (or Loss) (Lines 9 and 10)

+ Depreciation (Line 20)

+ Depletion (Line 21)

+/- Amortization or Casualty Loss (Line 26)

+ Net Operating Loss & Special Deductions (Line 29c)

– Mortgages, Notes, Bond payable in less than 1 year (Schedule L Line 17)

– Travel, Meals & Entertainment (Schedule M-1 Line 5c)

– Dividends Paid (Line 6 Schedule B)

= Sub Total

x Percentage of Ownership (Line 12) – Example: If you own 50% of the company, divide the final number by 50%.

= Total Qualifying Income

The aforementioned formulas are only a guide; please send us your tax returns if you would like us to determine your qualifying income.