Sometimes we have a borrower that is missing the AUS approval by a mere few dollars, nothing more heartbreaking than a 46% DTI approve/ineligible finding. But do not give up on the borrower that you have worked so hard to earn their business! Make sure you have checked every corner of the application for additional income. It is common knowledge that you can add back deprecation into your cash flow analysis, some people look only under the deprecation lines on the borrowers personal or business tax returns and stop there, but look closer there is more depreciation available!
Commonly overlooked depreciation
A commonly forgotten income add back is the deprecation credit that boosts your borrower’s income who uses the IRS standard mileage rate as a tax deduction. This deduction is only used by employee’s who have unreimbursed expenses, and borrowers who have a schedule C business. (The IRS does not allow this type of deduction on 1065 partnership/LLC, 1120S corporation, or 1120 corporations). Vehicle depreciation income can be very significant given how many miles people drive, so let’s go over the key points of this income booster.
How does it work?
When a borrower uses his/her personally owned vehicle the current tax code allows the borrower to deduct those auto operating expenses from their personal income. The deduction can be handled in two different ways.
The first option is to use actual expenses, this means the borrower keeps receipts for all the gas, maintenance, insurance, and other expenses directly related use of the vehicle for business purposes. The second option is the IRS allows a standard mileage deduction, the standard mileage deduction is the government estimate of what every mile you drive costs you. This estimate is built on gas, maintenance, and deprecation of the vehicle. After all the miles you put on your vehicle the lower the resale becomes, or in other words your vehicle depreciates. These deprecation rates are documented on IRS Notice 2016-01. As stated in the document the depreciation rate for 2012 is $.023, for 2013 is $0.22, for 2014/2015/2016 is $0.24.
How to calculate vehicle depreciation
Now that we know what the income is, let’s go over where to find it and how to calculate the additional vehicle depreciation income.
Example 1: Employed borrower using form 2106
The business miles driven is found on line 13 of the 2106 form. Multiply the miles driven by the correct deprecation rate for the tax year in question. In this example we will use the 2015 rate with 10,000 miles driven.
In this example, we can add back $2,400 to reduce the 2106 expenses by $200 per month, which in turn boosts the borrower’s income.
Example 2: Borrower owns a schedule C business and claims business miles driven
This expense can be found on line 44A of the schedule C business return. In this example, we will use the 2015 rate with 10,000 miles driven.
In this example, we can add back $2,400 additional dollars on the FNMA 1084 or FHLMC 91 cash flow analysis forms.
I hope this information helps you close more loans! As a reminder, we have built Uberwriter to handle all the income situations discussed in this blog. Check out www.uber-writer.com to get your free basic level subscription to use the best income determination tool on the market.