Last week, I explained how to calculate your personal income from an LLC and a sole proprietorship, at least from a mortgage underwriting perspective. This week, I will tackle the two corporate entities: the S-Corp and the C-Corp. The C-Corp is the standard “corporation,” and is what most people think of when they think of a corporation. The S-Corp is a little different, and has some unique characteristics, so I will start there.

The S-Corp, so called because it is defined in Subchapter S of the Internal Revenue Code, is a kind of pass-through tax entity. In this way, it is more akin to a LLC than a corporation, as both the LLC and S-Corp pass all earnings or losses directly to the owners’ personal income tax. But that is about the only similarity between the two business entities.

When you own a S-Corp, you need to file a Form 1120S at the corporate level. This form is where you calculate your gross profit, net profit, deductions, and, ultimately, your business profit or losses. This Form 1120S is really a separate tax return from the personal tax return, which must also be filled out. And any profits or losses from the business must be accounted for on the personal tax returns of the owners of the business.

So to calculate what your income is from a S-Corp, you need to determine the corporate profit and divide that by your share of the business. Then, add in any W-2 earnings you took as a salary from the business. This will all be reported to your personal tax return, and will be the income you can claim when applying for a mortgage.

If you have any questions about how much income you can use to get a mortgage from a business you own, please contact me. If you have anything to add about calculating income from a S-Corp, please leave a comment.