How do I create a P&L for a consulting business that barely exists?
August 9, 2016 5:36 PM   Subscribe

I'm trying to get a mortgage and the underwriters want a profit and loss statement for my consulting practice. I do not have one. Moreover, I'm not doing any consulting work in 2016. And in 2015, my consulting amounted to about $3000. But I've been depreciating a laptop since 2013. I'm not asking them to give me a mortgage based on my consulting practice. I also have a full time, salaried job that is totally adequate to the loan I'm applying for. So what do they actually want from me?

Here's what they actually said:

"Please provide us a Profit and Loss Statement & Balance Sheet for your consulting in a standard accounting format. We realize that you are no longer consulting so providing a P&L and balance sheet showing no income is fine."

Here's what makes this sticky:

I made ~$3000/year on consulting work in 2014 and 2015. I use Turbo Tax and walk through their dialog to estimate my expenses and depreciate my laptop. I bought the laptop in October of 2013 for $1200.

In 2015, I listed the laptop as "Property used 50% or less in a qualified business use:" and called it 25% -- I think that was accurate. Turbotax came up with a $61 depreciation. That is all shown in my tax returns, which they have.

What I don't want to do is send them a statement that says I made $0 and spent $0, if I should be saying I'm operating at a loss because I have this laptop that I'm not using for business. And I definitely don't want to give them something that will have them asking why I include my laptop on my taxes but not my P&L. I certainly don't want to lie. But I also don't really see how it makes sense to hire an accountant right now, just to figure out what Turbo Tax would say at the end of the year.

Does any one have any idea how the laptop depreciation would work on my taxes, given that it was not used for business in 2016?

How do I create an earnest and sincere Profit and Loss Statement in this situation?
posted by amandabee to Work & Money (7 answers total) 3 users marked this as a favorite
Basically just call them and tell them that you do not want to consider that income for this application. You can just provide them your taxes to show that it's not operating at a loss and that it's not your primary source of income. If they press, just tell them that they don't exist.

The relevant term to search for here is "Ability to repay" along with "qualified mortgage".

If, for some reason, they still need to see a P&L and balance statement, they might have a generic form(s) you can fill out. They don't actually have to do anything with the balance sheet, just have it or at least document a good faith effort to obtain it. The P&L might be a bit more relevant, again, just to document that business is not a source of loss or debt or something. If there is literally nothing to show, just use their form or find a generic one on the internet and fill it all in with zeros. If the business has no physical assets, debts, or equity, you can do the same thing, all zeros. And it will be SO easy to make sure it balances.
posted by VTX at 7:09 PM on August 9, 2016

Is it possible your lender thinks consulting is your primary source of income? I can't think of any other reason why they'd want an income statement and balance sheet from an irrelevant side business.

Seconding VTX's advice, I would get in touch with them to clear up what I suspect is some miscommunication or misunderstanding.
posted by BadgerDoctor at 7:58 PM on August 9, 2016

Someone (an accountant? Maybe?) once told me that this can demonstrate that you're not losing a _lot_ of money on a business, which would _subtract_ from your other income and, naturally, make you a bad loan risk. They were talking about a tax return, but I imagine that a P&L might give similar info.
posted by amtho at 8:51 PM on August 9, 2016

Response by poster: Thank you!

I had already sent them one letter clarifying that this was not a significant source of income and I had no expectation of continuing income from consulting, so this threw me for a loop. But my letter was focused on income not expenses, so maybe that is what they were looking for.

But I did reach out and explain that I don't have a P&L and I would need to consult an accountant to prepare one in earnest because I don't know how depreciation of the laptop works from an accounting perspective.

We'll see.
posted by amandabee at 9:37 PM on August 9, 2016

Best answer: Businesses can run at a significant loss, and the mortgage lender wants to protect against that. (Are you spending on advertising, travel to potential clients, printing materials, etc.?) To the underwriter, you are still in business because you are depreciating an asset. It's likely that they will require the documents to write the mortgage no matter how negligible its impact, because it's a box that they need to check.

In your situation, I'd use the free trial of Quick Books (self-employed) and crank out a P&L and a Balance Sheet.
posted by 26.2 at 9:37 PM on August 9, 2016 [1 favorite]

Best answer: It's not about what the mortgage lender wants it's about what they must document to comply with the Ability to Repay regulations. They just need the documents so that they can check a box and not get hassled by their QA people (I know because I am A QA person though likely not YOUR QA person).

The can't just exclude the income without good reason. If this were a part-time job or something, you could just tell them not to include it. They can't exclude income unless the applicant tells them too. Otherwise they can run afoul of fair lending regulations. But because it's a business, even if you tell them you don't want that income included, they still need enough documentation to show that it's not a source of loss.

You quite literally just need to whip something up with the bare minimum of information to be a P&L and a balance sheet.

Revenue: $0
Expenses: $0
Profit/(loss): $0

Assets: $0
Liability: $0
Equity: $0

You could honestly scribble that down a piece of paper, add your company name, and sign it, and that would be good enough.

As long as YOU are okay with them basing your income on those numbers (and you've said that you are) then the bank is too. If, later, you default on the loan and sue the lender for predatory practices claiming that you did not, in fact, make as much money as your claimed and they should have known that from the documentation you provided, then you could potentially have an issue with the documentation but even then, they'll just re-calculate your income based on the other docs you have and that would show that you met their credit requirements so no lawsuit for you.

There isn't really a downside here for you.
posted by VTX at 6:19 AM on August 10, 2016

I worked in insurance. Insurance is in a weird space where the industry is subjected to both federal medical laws, like HIPAA, and federal financial industry laws, like Gramm-Leach-Bliley.

As noted above, they have things they need to comply with. But, also, these days, a lot of stuff gets entered into a computer database somewhere. These are often frustratingly stupid. So, they probably need a number to put into some field and they need you to provide that number. They cannot type a note that says "She says she isn't really consulting anymore." They also cannot type $0.00 because you said you aren't really consulting anymore. That would be fabricating information.

So, even though it seems stupid to you, they need you to do exactly what they told you to do of write down on a piece of paper that you made $0.00 this year and give them the piece of paper so they can turn around and write $0.00 in some stupid box in some database without getting in trouble with QA or the federal government.

I often had to make phone calls or write letters to get specific dates for things in order to cut a check, even though I had medical documentation that stated they got all the treatment and they met all other criteria for qualifying for coverage, but without the right dates to plug in to the database, my hands were tied. They were tied because I could not cut the check without filling out the database, the database required specific dates and, no, I could not just make up dates, even if I knew they had ten appointments in this specific six week period.

So, as said above, Google up a "standard accounting form" and put zeros in all the appropriate slots, print it off and sign it. This probably will never come up for purposes of paying your taxes. It likely has zero impact on the idea of depreciating your laptop for purposes of filing taxes. Even if you got audited, the laptop is a small enough amount and it is a weird enough situation, you could plead "honest mistake -- I wasn't sure what to do" and that would likely be good enough.
posted by Michele in California at 10:55 AM on August 10, 2016

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