What is the first step when calculating self-employment income for qualifying purposes?

The first step in calculating self-employment income for qualifying purposes is to average the income reported from the last two tax returns. This approach provides a consistent and reliable measurement of income, accounting for potential variations in earnings over a two-year period. By using the net income figures from these tax returns, it becomes possible to assess a more accurate representation of the individual's earning capacity rather than relying on a single year's profit, which may be atypical due to various factors such as seasonal fluctuations or one-off expenses.

This method allows lenders to establish a baseline for income, contributing to a comprehensive evaluation of the borrower’s financial stability and consistency, essential for qualifying for loans or credit.

The other options, while relevant in various contexts of financial assessment, do not serve as the initial step in identifying self-employment income. For example, adding back expenses to net profit may be part of the process to arrive at a more accurate income figure, but it does not occur before averaging the income reported on tax returns. Similarly, including future projections for income and calculating personal finances are usually considered at later stages of the evaluation.