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Digging for dollars? 10 legitimate additions to recurring cashflow!

The questions I am getting at the ‘Ask Linda‘ section of my website are more focused on finding ‘adds’ or ‘add-backs’ than ever before. Whether in a recession, in recovery or in-between, lenders need to convert taxable income into cash flow available to pay debt.

What can you add or add back?

When you read the list, if any of them are new to you or you do not understand, check your comprehensive self-study manuals (or buy them from me if you do not have a current one), take a module module on the subject or come (or come back) to in person training.

Top Ten Adds and Add-Backs

  1. Depreciation you know, but don’t forget amortization. Unlike depreciation, which has it’s own dedicated line number on every business return, you’ll find amortization on the ‘other expenses’ schedule of the return. 
  2. Tax-exempt interest. On a 1040 you’ll find it off to the side on Line 8b. Since often the numbers off to the side are part of a calculation or even included in the numbers elsewhere, it is easy to miss when you should include it. On other returns, you’ll find this on the line in the upper right of Schedule M-1. I’d give you a line number but the IRS has different line numbers on the 1065, 1120, and 1120S.
  3. Carryovers, but only if they have reduced a amount you are including in cashflow. Carryovers are expenses or losses from a prior period that were not fully deductible in the previous year. So your add-back list includes, for example, capital loss carryovers on Schedule D if you are including Schedule D income or loss in your cashflow calculations. If you are not counting the capital gains for (or capital losses against) your borrower, no go. You can’t use this.
  4. Net Operating Losses if, once again, you have started with an amount that includes this loss. For example, if you use the AGI method of 1040 analysis, AGI was reduced by the NOL on Line 21 so add it back. But if you use the Schedule Analysis Method on the 1040, simply pass on the NOL since it did not impact cashflow. On an 1120, if you start with Line 28 for cashflow, ignore the NOL. If you start with Line 30, add it back.
  5. Nonrecurring expenses. This is an add-back if you are working on recurring cashflow available to pay debt (and family living expenses if a personal loan). Disaster repairs, settlement fees, capital improvements to name a few. And even if you are working up historical cashflow, you’ll want to notice these and consider them in your write-up if they made a big difference in cashflow that year.
  6. Optional expenses. This may be a harder sell but keep it in mind. Does the business have to make charitable contributions? Consider if they are more personal on the part of the owner rather than PR in the community. Do the owner’s have to take that much in compensation? Consider a global cashflow to find out.
  7. Miscellaneous Nontaxed Income like child support, military pay in Iraq, minister housing allowance, foster care payments received. 
  8. IRA and Pension receipts…be sure you are giving them credit for the full amount received, not just the taxable. (And be sure it is recurring, not just a one-time lump sum payment.)
  9. Principal received on a note or contract receivable. Your clue will be the interest reported on Schedule B of the 1040. If it is from a person or a business instead of a bank or credit union, they are receiving payments on a note or contract. Find out how much they are receiving and how much longer to decide if there is recurring cashflow.
  10. New income. Be sure to look at their application and their year-to-date financial statements to find income they are receiving now that they were not in the tax return year. This could be a new rental, new alimony, a new note receivable.

That is not an exhaustive list but should remind you of the possible ways in which a tax return does not reflect recurring cashflow available to pay debt.

Subtractions to get to Cash Flow?

I suppose, to be fair, I should include a post on all the legitimate subtractions to recurring cashflow. Maybe next time!

Anything else I should add to the short list of additions?

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.