Many small (and no-so-small) business owners have difficulty understanding what their income is for the purposes of buying a house. There was a time when business owners could simply state their income and banks would accept that, understanding that “actual” income is not always what they show on paper. Unfortunately, those days are long gone and everybody needs to be able to prove their income.

In order to prove your income, you need to show it on your tax return and, if applicable, show a W-2 or a 1099 with a paystub which confirms the income. So the question then becomes: how can you calculate your income? Today, I will go into the ways a sole proprietorship would prove income.

Let me preface this by stating that you will likely need to have owned your business for at least two years, with consistent returns each year. So with that out of the way, you can begin calculating your income. Start by determining how you pay yourself. For a sole proprietorship, it is almost always a Schedule C. If this is the case, you want to calculate your gross receipts (gross sales) by adding up all of the income your business made through the sale of good or services.

With this number, you want to calculate all of the expenses which directly relate to you running the business – this can be materials for building your item, costs to run a retail space, gas, mileage, phones, utilities, etc.. Now you can subtract the deductions from the gross sales and that should be the net income of the business. And in the case of a sole proprietorship, the net income of the business passes through to the owner as personal income.

What this means for you is the more you deduct in expenses, the lower your personal income will be. The lower your personal income, the less you will be able to qualify for when trying to buy a new house.

If you are self employed and have any questions about what your income would be for the purposes of buying a new home, please contact me. If you have anything to add about calculating income for a sole proprietorship, please leave a comment.