Self-employed income

For an employee the question is “how much of this pay counts?”. For a business owner there's a question before it: which year's income? Most lenders want two years of tax returns, and the two years are rarely the same. A growing business looks very different depending on whether a lender reads the latest year, the average, or the lower of the two.

Add-backs

The taxable profit isn't the end of it. Some expenses in a business's accounts don't reflect cash the owner actually lost, or won't happen again, so lenders add them back:

• Depreciation: an accounting cost, not money out the door that year.
• Interest on a loan that is being refinanced or paid out.
• One-off costs, such as a legal bill or a relocation.
• Extra super contributions above the compulsory amount.

Which add-backs a lender accepts, and whether it adds them to both years or only one, varies. So do the rules for companies and trusts, where profit can be kept in the business or split between family members.

The lenders at the top of this chart read the latest, higher year. Most of the rest average the two. Now switch on the “what if”: the same client, with only the latest year's return supplied. 11 lenders lend more, by up to $240k. 1 lender lends less, by as much as $370k. 1 lender lends nothing at all: one year of returns isn't enough for it. 3 lenders don't change. 11 lenders won't take the deal on one year of returns at all. Same business, same profit: whether a lender wants one year or two changes the answer, in both directions.