Lenders read your tax returns to verify revenue and profit. Brian's tax-basics breakdown, translated for the SMB owner who wants to know what the underwriter sees when they pull your 1040.
When you apply for business funding, lenders pull your tax returns to verify what you actually earned — not what you say you earned. For sole props and single-member LLCs, that means your Schedule C net profit. For S-Corps, it means your 1120-S plus your W-2 salary. Maximizing deductions is good tax strategy; it also reduces the income lenders will underwrite against. Understanding this tradeoff before you file changes how you approach deductions.
Brian's video above is an accountant's walkthrough of small business taxes for first-time filers — the kind of clear explanation most owners don't get until tax season is already late. This written companion translates the same content through a second lens: what your tax return tells the lender who pulls it. Because when you apply for business funding, your tax returns don't just go to the IRS — they go to underwriters who read them for very specific signals.
The short version: your tax return is income verification. Banks and SBA lenders require 2–3 years of personal and business returns. Alternative-tier lenders often work from bank statements alone, but returns become relevant as you climb the product tier. What the underwriter is looking for is simple: how much did this business actually earn after expenses?
The number they use is not gross revenue. It's not what you told the bank you make. It's Schedule C net profit (for sole props and single-member LLCs) or K-1 distributive income plus W-2 salary (for S-Corps). That number drives the loan sizing and often determines tier eligibility.
If you operate as a sole proprietor or a single-member LLC not taxed as a corporation, your business income and expenses flow through Schedule C (irs.gov/forms-pubs/about-schedule-c-form-1040) of your personal 1040. The structure:
The deductions in Part II are legitimate and legal. They also reduce Line 31. A business grossing $200K that takes $140K in deductions reports $60K net profit. Lenders underwriting a line of credit might size at 10–15% of annual income — the difference between $20K or $60K in net income can be the difference between a $3K line and an $8K line, or between qualifying and not qualifying at all.
Employees split payroll taxes with their employer. Self-employed owners pay both sides. Self-employment tax is 15.3% on net self-employment income per IRS Schedule SE (irs.gov/forms-pubs/about-schedule-se-form-1040): 12.4% for Social Security (up to the annual wage base — $176,100 for 2025, per IRS Revenue Procedure 2024-40; verify the 2026 amount at irs.gov) and 2.9% for Medicare with no ceiling. Above $200K for single filers, an additional 0.9% Additional Medicare Tax applies.
The silver lining: you can deduct half of the SE tax you pay on Schedule 1 of your 1040, which partially offsets the cost. But the first year most owners run the numbers, the bill surprises them. At $80K net self-employment income, SE tax alone is roughly $11,300 before income tax. Plan for it.
W-2 employees have federal income tax withheld automatically. Self-employed owners don't — you're required to prepay through quarterly estimated payments per irs.gov/businesses/small-businesses-self-employed/estimated-taxes. Missing or underpaying these results in an IRS underpayment penalty at year-end.
Four payment deadlines per year: - April 15 — Q1 (January–March) - June 15 — Q2 (April–May) - September 15 — Q3 (June–August) - January 15 — Q4 (September–December)
The safe harbor rule: you avoid penalties if you pay 100% of your prior year's tax liability (110% if prior-year AGI exceeded $150K) OR 90% of the current year's actual tax. The practical approach for new owners: set aside 25–30% of every payment you receive into a separate tax account and make quarterly deposits from it. Adjust the percentage as you learn your actual bracket.
Lenders see the same return the IRS sees. Maximizing deductions is good tax strategy and often the right move — but it reduces the income underwriters will count. Some categories worth understanding:
If you're planning a funding application in the next 12–24 months, it's worth running the deduction strategy by your accountant with the underwriting implication in mind.
S-Corp owners are paid two ways: W-2 salary (subject to payroll taxes) and K-1 distributions (not subject to payroll taxes). Lenders underwriting an S-Corp owner look at:
SBA and bank lenders typically add W-2 + K-1 income together to assess the owner's total compensation from the business. They also look at whether the business (at the 1120-S level) has consistent positive net income. Taking minimal salary to reduce payroll tax while taking large distributions helps taxes — but it can look like low compensation to a lender who doesn't do the full add-back.
We're a funding platform, not a tax advisor. The tax information above is educational — consult a CPA or enrolled agent for your specific situation. Where we fit: when your business is at the point where you're thinking about a loan or line of credit, start an application and let us route you to the right lender partner. Five minutes, no hard credit pull at pre-qualification. If you want to check product eligibility before applying, the funding calculator gives you a 30-second snapshot based on your current profile.
Self-employment tax covers both the employee and employer share of Social Security (12.4%) and Medicare (2.9%), totaling 15.3% on net self-employment income up to the Social Security wage base ($168,600 in 2024, adjusted annually). Employees split this with their employer — self-employed owners pay both sides. You can deduct half the SE tax from gross income on Schedule 1, which partially offsets the bite. An S-Corp election avoids SE tax on the portion of income taken as distributions (above a reasonable salary) — the payroll tax savings is the primary reason most sole props elect S-Corp status once profitability justifies the additional compliance cost.
The IRS pay-as-you-go system requires self-employed owners to prepay federal income tax and self-employment tax quarterly. The four deadlines are April 15, June 15, September 15, and January 15 of the following year. The safe harbor amount is either 100% of prior-year tax liability (110% if your prior-year AGI exceeded $150K) or 90% of the current year's expected tax. Pay less than the safe harbor and you'll owe an underpayment penalty at the end of the year. Most new business owners underestimate this and get hit with a surprise tax bill their first year — setting aside 25–30% of net profit quarterly is a practical starting point.
Lenders use tax returns to verify income — specifically to see the difference between your stated gross revenue and your actual net profit after deductions. One year of returns shows a snapshot. Two years shows a trend: is revenue growing, flat, or declining? Is the business consistently profitable? Year-over-year comparison also surfaces anomalies — a business that was highly profitable one year and showed a loss the next raises underwriting questions. SBA requires 3 years for some products. At the alternative tier, some lenders work from bank statements alone if returns aren't available.
Yes, directly. Lenders underwrite to net income (taxable profit), not gross revenue. A sole prop who grosses $180K and takes $120K in deductions reports $60K net income — that's the number the underwriter uses. A business line of credit might be sized at 10–20% of annual net income, which changes dramatically depending on deduction strategy. The tradeoff is real: legal deductions reduce taxes now but also reduce apparent income for the next 12–24 months. Some owners structure deductions to optimize funding eligibility in periods when they plan to borrow, and maximize deductions in other years.
Schedule C is filed by sole proprietors and single-member LLCs not taxed as a corporation. Net profit from Schedule C flows directly onto your personal 1040 as self-employment income — lenders see it as the owner's income from the business. Form 1120-S is the S-Corporation information return. S-Corp owners receive a W-2 salary (reported on your personal 1040) plus a K-1 (showing distributive share of S-Corp income). Lenders underwriting an S-Corp look at both: W-2 + K-1 income is the relevant number, not just the salary. The 1120-S itself shows the business's gross revenue, expenses, and net income at the entity level.