allowableOwner compensation
Owner excess salary
Compensation paid to an owner above the documented market cost of a replacement manager.
Rule
Add back the difference between actual owner compensation (W-2 plus distributions treated as compensation) and a documented replacement salary. For SDE, the full compensation of one working owner is added back and a replacement salary is deducted in the lender's cash flow.
Evidence lenders expect
- Form 1125-E or W-2 for the owner
- Payroll register
- Market salary survey or job posting for the replacement role
Worked example
As reported
Owner W-2 $265,000
In the memo
Replacement manager $120,000 · add-back $145,000
The objection you will hear
Lenders reject replacement salaries that are below market for the role or that ignore a second working owner.
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