How to Calculate Schedule C income

Written By: Melandie Rota

Tax returns are used to determine a self-employed borrower’s cash flow.  To determine the borrower’s cash flow, there are two common ways to calculate self-employed income: the Adjusted Gross Income (AGI) and the Schedule Analysis Method (SAM).  The method you use will be determined by your investor's requirements or company policy.  Schedule C is the profit and loss statement of a sole proprietorship.  Schedule C is part of the borrower's income tax report on IRS Form 1040.  The Schedule C shows the income of the business for the tax year and deductible expenses, which results are either a net profit or loss of the business.

Underwriters should always start with lines A, B and C on Schedule C.  Confirm the entries for principal business and business name to the loan application and make sure you confirm the borrower is in the same line of work as when the tax returns were filed. It is important to identify the accounting method that the borrower used.  The accounting method could affect the income figures.  Also, confirm if the business started or acquired the business during the tax year, if so additional documentation will be required to determine if business income can be used as income.

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Start your analysis with line 31 Net Profit.  This figure is the income after all deductions and expenses for the business.  You will add the net profit or subtract the net loss from the borrower cash flow.  Line Six Other Income must be analyzed to determine if it stable and recurring.  If it's not stable and recurring, subtract other income or add other losses to cash flow.  Then, take a look for non-cash expenses that you can add back to the borrower's cash flow such as:  Depletion, Depreciation and Amortization.  A non-cash expense is an expense that is not paid in cash.  Depletion is the exhaustion of natural resource such as oil, gas, standing timber or mineral deposits.  Businesses that uses natural resources will be allowed to add back depletion to cash flow.  Depreciation is another business expense that is allocated over the useful life of a declared asset.  The “expense” reflects a reasonable allowance for the wear and tear of an asset such as: real estate, rental home, commercial property, furniture, cars and office equipment therefore depreciation should be added back to cash flow.  Amortization is a write-off of initial costs incurred by the borrower prior to the beginning of formal business operations.  Amortization must be listed on the tax return on Schedule C in order to be added back to cash flow.   Next, look for business-related meals and entertainment line item twenty four B Travel, Meals and Entertainment.  Borrowers are allowed to deduct 50% of his/her out-of-pocket costs on the tax return therefore line twenty four B must be subtracted from borrower cash flow. Line 30 Expenses for Business Use of Home is an expense the borrower can add back to his/her own cash flow, if the borrower operates the business out of the home.  A percentage of business miles can be added back to cash flow. If borrower shows business miles on line item forty four A and casualty or theft, loss can be added back to cash flow if it is a one-time expense related to the business.

Schedule C income is the easiest self-employment income to analyze and calculate.  Remember, when reviewing tax returns, analyze all incomes, expenses and losses to determine borrower true cash flow.  Underwriters should use either the Fannie Mae Form 1084 or Freddie Mae Form 91 worksheets to calculate cash flow for self-employed borrowers.

About The Author

Melandie Rota - Along with being a Mortgage University Instructor, Melandie is currently serving as a Senior Mortgage Loan Underwriter.  She has over 15 years of experience in the mortgage industry. She served as a Loan Processor, Senior Processor, Processing Manager, Loan Originator, Mortgage Underwriter, Due Diligence Underwriter and Senior Mortgage Loan Underwriter.  She is very dedicated in teaching and leading beginners in the mortgage industry. If you're interested in becoming a writer for NAMP®, please email us at:

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.