What’s the best way to account for personal and corporate use of vehicles for schedule C profiles?
Jim, it depends. My favorite answer. What it depends on is how you determine credit-worthiness…global debt coverage ratio, entity-level debt coverage ratio, or net cash flows from all activities combined with a personal debt-to-income limit.
You went on to say you normally remove the auto debt from the client’s cash flow if the expense reflects on the Schedule C, but wondered if it would seem more appropriate to include the debt personally, then adjust the income picture to add-back this expense (for partial use of a vehicle).
I am not sure I would do either, depending on the use of the vehicle. Here are some choices with pros and cons.
Some lenders put all debt, business and personal, on one global debt list. If that is the case, just add back interest from the Schedule C and enter the auto loan payment on the global debt list.
Be aware that on occasion, the borrower enters the car interest on Line 9, Car and Truck Expense, instead of Line 16, interest. Then it is harder to spot the interest.
The complication, though, is your plan to add back the car and truck expense if you go this route. Car and truck expense may include interest expense, but also includes actual out-of-pocket expenses for gasoline, oil, repairs, insurance and such.
While some of that may not be impacted by mileage put on the vehicle for business (insurance, for example), some of it certainly is. If I drive 10,000 miles a year for business, of course there are extra costs for that.
So consider adding back the interest and putting the debt on the global debt list, but you may need to leave the car and truck expenses as is.
Net cash flows from the business
Some lenders subtract business debt from the business entity to get net cash flows personally available. If they do not force a DCR ratio of more than 1.0 on the business, then this approach gives you a higher DCR overall, or a lower debt-to-income ratio, whichever you are using to qualify your borrower.
As with the global debt approach, if they have included car and truck expense on Line 9 and it is actual out of pocket costs of gasoline, oil, insurance etc I leave that in either way. Those are real costs and if they are being honest about their usage, they are additional costs related to the business use.
Adjustments to Car and Truck Expense
One adjustment commonly made to car and truck expense is to add back 1/3rd of it if they are using the standard mileage allowance. That is because part of the allowance is for depreciation, and we add back depreciation because it is non cash.
This adjustment can be made whether you use a global debt or a net cash flow approach.
More on Schedule C and Depreciation
Here are the links to our Online Modules on Schedule C and on Depreciation. Enjoy!