A sole proprietor applying for a Fannie Mae loan reports $71,000 of Schedule C net profit after deducting $9,400 of depreciation and $6,200 of ordinary recurring equipment-maintenance expenses. Assuming no other adjustments, what annual cash flow results?
Correct Answer
B) $80,400, adding back depreciation but retaining recurring maintenance expenses
B. The stated annual cash flow is $80,400. Start with the $71,000 net profit, which already reflects both deductions. Add back $9,400 of depreciation: $71,000 + $9,400 = $80,400. Leave ordinary recurring maintenance deducted. Scope and exceptions: This is the cash-flow calculation under the stated Fannie Mae assumptions. It is not a conclusion about income stability, final qualifying income or tax liability. Source: B3-3.6-03, Recurring vs. Non-recurring Income and Expenses — https://selling-guide.fanniemae.com/sel/b3-3.6-03/income-or-loss-reported-irs-form-1040-schedule-c
Why This Is the Correct Answer
B. The stated annual cash flow is $80,400. Start with the $71,000 net profit, which already reflects both deductions. Add back $9,400 of depreciation: $71,000 + $9,400 = $80,400. Leave ordinary recurring maintenance deducted. Scope and exceptions: This is the cash-flow calculation under the stated Fannie Mae assumptions. It is not a conclusion about income stability, final qualifying income or tax liability.
Why the Other Options Are Wrong
Option A: $77,200, adding back maintenance expenses but retaining depreciation
It adds back the operating expense instead of depreciation.
Option C: $71,000, using Schedule C net profit without adjustments
It omits the required depreciation adjustment.
Option D: $86,600, adding back both depreciation and maintenance expenses
It reverses the recurring maintenance deduction without support.
Exam Tip
Start from net profit and justify each adjustment separately.
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