The income (or loss) from a borrower’s sole proprietorship is calculated on IRS Form 1040, Schedule C, then transferred to IRS Form 1040.
The lender may need to make certain adjustments to the net profit or loss shown on Schedule C to arrive at the borrower’s cash flow. For example, Schedule C may include income that was not obtained from the profits of the borrower’s business. If the lender determines that such income is not recurring, it should adjust the borrower’s cash flow by deducting the nonrecurring income.
See B3-3.2-02, Business Structures, for more information on sole proprietorships.
The lender must determine whether income is recurring or non-recurring.
Non-recurring income must be deducted in the cash flow analysis, including any exclusion for meals and entertainment expenses reported by the borrower on Schedule C.
The following recurring items claimed by the borrower on Schedule C must be added back to the cash flow analysis: depreciation, depletion, business use of a home, amortization, and casualty losses.