Expense Certification For 1099 Loans

We typically offer two primary methods to establish the legitimate business expense factor: a fixed, uniform ratio (no certification needed) or a certified expense statement from a third-party tax professional.

A. Uniform Expense Factor (Standard Default)

When specific expense information or third-party certification is not provided, we apply a standard, fixed expense ratio to the gross receipts.

• Fixed Ratio: The most common fixed expense factor applied to all eligible gross receipts is 10%.
• Qualifying Income: Applying this fixed factor means the borrower’s qualifying income is calculated as 90% of the gross 1099 earnings.
• Application: This ratio is utilized so long as it is deemed reasonable for the borrower’s line of work and the borrower qualifies.

B. Third-Party Certified Expense Ratio (Expense Letter)

An expense certification provided by a recognized tax professional offers an alternative method to calculate income, potentially resulting in a higher qualifying income if the borrower’s actual expenses are lower than the standard fixed ratio.

• Required Professionals: The certification must be provided by a qualified third party, such as a CPA (Certified Public Accountant), EA (Enrolled Agent), or licensed tax preparer (PTIN/CTEC).
• Documentation: The preparer must provide a signed statement indicating the borrower’s expense ratio based on their review of the most recent year’s tax return. The letter generally may not include any exculpatory language.
• Calculation: The stated expense ratio from the letter is multiplied by the gross receipts shown on the 1099s. This resulting expense figure is then deducted from the gross receipts to determine the qualifying income.