How does depreciation affect the net profit when calculating qualifying income?

Depreciation is a non-cash expense that reflects the decrease in value of an asset over time. When calculating qualifying income, especially in the context of evaluating cash flow for financing purposes, depreciation is added back to net profit. This is because it does not represent an actual cash outflow; instead, it is an accounting method to allocate the cost of a tangible asset over its useful life.

By adding depreciation back to the net profit, it provides a clearer picture of the actual cash available to the business. This approach recognizes that, while net income may show a lower profit due to depreciation expenses, the business still maintains cash flows that can be used for obligations, investments, or distributions. Therefore, considering depreciation in this manner helps in assessing the overall financial health and liquidity of the business, which is crucial for qualifying income assessments.