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Are you missing a depreciation add-back?

Often lenders add back depreciation everywhere they find it…front page, 4562, Schedule K of an 1120S or 1065 (Section 179), M-1 of an 1120, 1120S or 1065 (both the left and the right side of that schedule)!

Often, they are adding back too much. The only depreciation to add back, ever, is depreciation that was subtracted from a figure you are using.

Add back depreciation on:

  • Schedule C, Business
  • Schedule F, Farm
  • Form 1120, 1120S and 1065, Page One

For most of you, do not add back depreciation on:

  • Schedule K of an 1120S or 1065 (it was not subtracted from taxable income so no need to add it back)
  • Schedule M-1 of an 1120, 1120S or 1065 (it was not subtracted from or added to taxable income on Page One of the return so no need to add it back)

So what have you been missing?!?!

I received an email from a lender who attended the October training on Tax Return Analysis for Lenders. Within the week, she had gotten an approval that she would not have gotten before the training. And when I checked back two months later, she had used this ‘new’ add-back again to change a denial into an approved loan.

There is depreciation buried in the middle of Form 8825, Rentals owned by corporations and partnerships. And yes, she had been missing the add back.

1040 Rentals…Line 3 minus Line 19?

Many lenders when analyzing a 1040 that includes rentals simply add the revenue and subtract the expenses BEFORE depreciation. Depreciation is separated out after the rest of the expenses and this is easy to do.

But on a business rental, Form 8825, the depreciation is in the middle of the rest of the expenses. Sure, you can still add income and subtract expenses, but then you need to ADD BACK DEPRECIATION.

I know, I am yelling, I am sorry. But I don’t want you to miss a valid add back and turn down a good loan. That would be sad!

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.