A child care provider writes:
> I have been doing home daycare for 8 years and I'm 29 years old! I am having problems trying to get a loan in my own name. I always have to have a co-signer and it's really getting old. I ask the banks why and it's always because of my debt-to-income ratio. My credit score is great. I'm at 738 right now, but the banks won't look at my income before deductions. My tax accoutant can't believe I'm having such a hard time. So say I make about $40,000. I own my own home. I have all the deductions with that, along with my daycare expenses, so say I have about $25,000 in deductions & expenses. (I'm not sure how much exactly it was, but last year my income was only $18,000 after deductions.) How do I go about proving my income before deductions? I've been told to set up a business bank account and write myself paychecks to show the bank to prove my income, but then my tax accountant says I will then pay more in taxes? I need advice, Please!
I don't think I'm going to be much help. It appears that you are at the mercy of the banks.
It's going to be hard to get the banks to look at your income before expenses, because when you are self-employed your business profit is considered to be your bottom line income. (Profit is gross income minus expenses.) The banks are in big trouble now for having given out loans to self-employed persons based on "stated income," so I'm sure that now they are requiring tax returns to see your actual profit.
Assuming you are a sole proprietor business person, as are most daycare providers, there is no way to put yourself on payroll. It's not allowed. And if it were, there would be unnecessary overhead, as your accountant pointed out. The business profit on your Schedule C (line 31) is your income.
The only way to show more profit (besides increasing your gross income) is to deduct less expenses on the Schedule C (100% expenses and home expenses). I don't recommend messing around with this, however. The Internal Revenue Service frowns on it, you will probably pay higher taxes, and there is absolutely no guarantee that the banks will be any nicer about giving you a loan.
You could get a business bank account, so that your business income is clearly identified by the deposits into that account. But that is still gross income and not profit, so I am dubious that the banks will be anymore favorable towards you. Especially in times like these.
Here's a related article about another provider with a low business profit.
Last updated 1 August 2010