Borrower’s Share of Income or Loss
The cash flow analysis can only consider the borrower’s share of the business income or loss, taking into consideration adjustments to business income.
Earnings may not be used unless the borrower owns 100% of the business.
Adjustments to Cash Flow
Items that can be added back to the business cash flow include depreciation, depletion, amortization, casualty losses, net operating losses, and other special deductions that are not consistent and recurring.
The following items should be subtracted from the business cash flow:
- meals and entertainment exclusion,
- tax liability and amount of any dividends, and
- the total amount of obligations on mortgages or notes that are payable in less than one year. These adjustments are not required if there is evidence that these obligations roll over regularly and/or the business has sufficient liquid assets to cover them.
For additional information, see B3-3.4-03, Analyzing Returns for a Corporation.