CPA expense ratio letter: sample wording and its limits
By Arthur Teboul, DokuTrak · Published
In brief
A CPA expense ratio letter states what share of a self-employed borrower’s gross receipts went to business expenses on a filed return, so a bank-statement lender can estimate income from deposits. The CPA computes it from named return lines (IRS Schedule C (Form 1040), 2025) and gives no view on future expenses or the ability to repay (The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018).
The letter: CPA expense ratio letter (facts only)
Compute the ratio from the filed return, name the lines in the letter, and keep the optional business-funds paragraph to facts. Send it only after the client signs a consent naming this lender. Have your professional liability insurer review your standard wording once.
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[Firm name] [Firm address] [Date] [Lender name] Attn: [Underwriter] Re: [Borrower name], loan [number]
Dear [Underwriter name],
Relationship
Our firm prepared the [YYYY] federal income tax return of [Borrower name] [and of (business name)].
The ratio
Based on the [YYYY] [Schedule C / Form 1065 / Form 1120-S] as filed, total expenses on [Line (number)] were [X.X]% of [gross receipts / gross income] on [Line (number)].
Basis
We computed this figure from the return as filed. The return was prepared from information [Borrower name] provided, and we did not audit, review or otherwise verify it.
Period
The figure covers tax year [YYYY] only. We make no statement about expenses, income or results for any later period.
Business account(optional)
According to the Schedule K-1 we prepared for [YYYY], [Borrower name] held [X]% of [business name]. The business bank statements you hold were provided by [Borrower name], not by our firm.
No assurance
We express no opinion on [Borrower name]’s financial condition, the effect of any withdrawal of business funds, or the ability to repay any loan.
Use and consent
This letter is for [Lender name]’s use with loan [number] only, and is sent with the written consent of [Borrower name] dated [date].
Sincerely, [CPA name], CPA [Firm name] License: [State] [number]
Who asks for it, and why
An expense ratio is total business expenses divided by gross receipts for one tax year. Bank-statement loans outside the agency guides use it to turn deposits into an income estimate. Each lender sets its own default ratio, so no percentage here is a rule.
Agency loans work differently. For a Fannie Mae loan, the lender reads the returns or transcripts itself and does its own cash flow analysis (Fannie Mae Selling Guide B3-3.5-01, Underwriting factors and documentation for a self-employed borrower). Either way, send nothing until the client signs a consent to disclose that names the lender (26 CFR 301.7216-3, Disclosure or use permitted only with the taxpayer’s consent).
Which return lines to use
Say exactly which lines you used. Two CPAs can get different ratios from one return, for example by including the home office or not, and the lender needs to know which one it holds. Gross receipts are the total sales or receipts on Line 1 of Schedule C, before cost of goods sold or returns (IRS Schedule C (Form 1040), 2025).
| Return | Numerator | Denominator | Source |
|---|---|---|---|
| Schedule C (2025) | Line 28, total expenses before business use of home; add Line 30 if you include home office | Line 1, gross receipts, or Line 7, gross income | Schedule C (IRS Schedule C (Form 1040), 2025) |
| Form 1065 or 1120-S | Total deductions line | Gross receipts line | Check the line numbers on that year’s form |
A worked example
Take a fictitious consultant whose 2025 Schedule C shows gross receipts of $180,000 on Line 1 and total expenses of $63,000 on Line 28 (IRS Schedule C (Form 1040), 2025). The ratio is 63,000 divided by 180,000, or 35.0% (IRS Schedule C (Form 1040), 2025).
The letter then says: “Based on the 2025 Schedule C as filed, total expenses on Line 28 were 35.0% of gross receipts on Line 1 (IRS Schedule C (Form 1040), 2025).” It says nothing about 2026.
The business-funds sentence
Lenders often add a line that withdrawing business funds for the down payment will not harm the business. The AICPA Journal of Accountancy treats that as a comment on solvency (Journal of Accountancy (AICPA), “Concerns About CPA Letters to Third Parties,” Mar. 2009). The AT-C 9105 interpretation bars it (The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018).
Fannie Mae puts that judgment on the lender: when business assets fund the loan, the lender performs a business cash flow analysis (Fannie Mae Selling Guide B3-3.5-01, Underwriting factors and documentation for a self-employed borrower). It may ask for several months of business statements or a current balance sheet (Fannie Mae Selling Guide B3-3.5-01, Underwriting factors and documentation for a self-employed borrower).
The borrower must also be listed as an owner of the business account (Fannie Mae Selling Guide B3-4.2-02, Depository accounts). A facts-only business-funds paragraph is one that states ownership from the K-1, such as a percentage, and nothing about impact. The optional clause below is written that way.
Questions people ask
How is a business expense ratio calculated from a tax return?
Total expenses divided by gross receipts for one year. On the 2025 Schedule C, that is usually Line 28 over Line 1 (IRS Schedule C (Form 1040), 2025); state the lines you used.
Can a CPA say using business funds will not hurt the business?
No. That is assurance on solvency, which the AT-C 9105 interpretation bars (The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018). The lender does that analysis itself (Fannie Mae Selling Guide B3-3.5-01, Underwriting factors and documentation for a self-employed borrower).
What if my CPA refuses to sign the lender’s letter?
Ask the lender to accept a facts-only letter or copies of the returns. The AICPA suggests sending the returns with the client’s written permission (Journal of Accountancy (AICPA), “Concerns About CPA Letters to Third Parties,” Mar. 2009).
Sources
- IRS Schedule C (Form 1040), 2025: On the 2025 Schedule C, Line 1 is gross receipts or sales, Line 7 gross income, Line 28 total expenses before business use of home, and Line 31 net profit or loss.
- Fannie Mae Selling Guide B3-3.5-01, Underwriting factors and documentation for a self-employed borrower: The lender verifies self-employed income with two years of signed returns or IRS transcripts, or one year when the business has existed five years and the borrower has owned 25% or more for five years, and performs its own cash flow analysis when business assets fund the loan.
- Fannie Mae Selling Guide B3-4.2-02, Depository accounts: Business assets may fund the down payment if the borrower is listed as an owner of the account and the account is verified.
- The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018: A CPA can confirm facts but must not attest to income accuracy; the AT-C 9105 interpretation bars assurance on solvency or debt service; Section 7216 requires written client consent.
- Journal of Accountancy (AICPA), “Concerns About CPA Letters to Third Parties,” Mar. 2009: Preparers rely on client information under Circular 230 § 10.34, need written client permission, should not sign lender-scripted letters, can send the returns instead, and should have their errors and omissions insurer review any letter wording they use.
- 26 CFR 301.7216-3, Disclosure or use permitted only with the taxpayer’s consent: A consent to disclose names the preparer, the taxpayer, the recipient, the purpose and the information, and is signed and dated by the taxpayer.
About the author
Arthur Teboul (Founder, DokuTrak) is building DokuTrak after watching professionals lose hours chasing clients for documents over email. Arthur Teboul.
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How this page was made (methodology): it is built from the primary sources listed under Sources, and every rule and figure on it links to the source it comes from. Last updated October 25, 2026. Spotted an error or a rule that changed? Contact us.
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