What is the maximum percentage of depreciation that can be added back for income calculations?

The correct percentage of depreciation that can typically be added back for income calculations is 10%. This figure is important in the context of analyzing a business's financial performance and assessing its cash flow.

Depreciation is a non-cash expense that reflects the wear and tear on tangible assets over time. When evaluating a business's income for financing purposes, lenders often add back a portion of depreciation to provide a clearer picture of the cash available for servicing debt. This is because depreciation, while it reduces taxable income, does not represent an actual outflow of cash during the period.

Adding back 10% allows for a conservative adjustment, ensuring that cash flow estimates remain realistic and financial assessments are prudent. Additionally, this percentage is commonly referenced in financial principles and standards related to loan underwriting and income evaluations.

The percentage chosen needs to balance providing a reflection of cash availability while not inflating the business's actual cash generation capability, which is why 10% is often deemed suitable for these calculations.