For business owners, proving income is often only part of the financial verification process. A lender, landlord, investor, government agency, or other organization may also want to understand the expenses associated with operating the business.

A CPA letter for income and expense verification can provide professional confirmation of certain financial information based on the records and documentation available to the CPA. It may be particularly useful for self-employed individuals and business owners whose financial information is not presented through a traditional employer-issued income statement.

In this guide, we explain what an income and expense verification CPA letter is, what information a CPA may verify, what documents may be needed, and how business owners can prepare for the process.

What Is a CPA Letter for Income and Expense Verification?

A CPA letter for income and expense verification is a document prepared by a Certified Public Accountant to provide information or confirmation about a client's business income and expenses.

Depending on the purpose of the letter and the CPA's professional relationship with the client, it may address information such as:

• Business revenue or income

• Business expenses

• Net business income

• A specific reporting period

• Self-employment income

• Business operations

• Information reported on tax returns

• Accounting records reviewed by the CPA

The exact contents depend on what the requesting organization needs and what the CPA can appropriately support through available records.

A CPA letter is generally not a substitute for an audit or other assurance engagement unless it is specifically prepared as part of such an engagement.

Why Might a Business Owner Need Income and Expense Verification?

Businesses and self-employed individuals may be asked to verify their financial information for many reasons.

Common situations include:

Mortgage or Home Loan Applications

A lender may need additional documentation when an applicant owns a business or receives self-employment income.

In some cases, the lender may request information about both business income and expenses to better understand the financial information being reported.

Business Loan Applications

Financial institutions may request income and expense information when evaluating a business financing application.

The request may involve historical financial records, tax returns, bookkeeping reports, or a CPA verification letter.

Rental or Lease Applications

A landlord or property manager may ask a self-employed applicant to provide additional evidence of income.

A CPA letter may be one component of the documentation requested.

Business Transactions

Income and expense information may also be relevant during certain business transactions, financing arrangements, or other financial reviews.

Other Financial Verification Requests

Depending on the circumstances, an organization may request professional confirmation of financial information before making a financial or administrative decision.

Because requirements vary, business owners should ask the requesting organization exactly what information it wants verified.

What Can a CPA Verify About Business Income?

The income portion of a CPA letter may address different types of financial information depending on the records reviewed.

A CPA may potentially verify:

• Business revenue for a specified period

• Income reported in accounting records

• Income reported on tax returns

• Self-employment income

• Business income attributable to an owner

• Historical income for one or more periods

It is important to distinguish gross revenue from net income.

For example, a business may generate $250,000 in gross revenue but have $180,000 in deductible and operating expenses. The resulting net income would be different from the gross revenue figure.

A CPA should clearly identify the type of income being discussed rather than treating revenue and profit as interchangeable.

What Can a CPA Verify About Business Expenses?

Depending on the purpose of the letter and the records available, a CPA may be able to provide information about business expenses recorded for a particular period.

Expenses may include categories such as:

• Rent

• Payroll

• Insurance

• Advertising

• Professional fees

• Office expenses

• Utilities

• Software and subscriptions

• Travel

• Supplies

• Equipment-related expenses

• Other operating costs

The CPA may use accounting records, financial statements, receipts, bank records, tax documents, and other supporting documentation to understand the business's reported expenses.

However, the CPA's letter should not imply verification beyond what the CPA has actually reviewed or can reasonably support.

What Documents May a CPA Need?

The documentation required depends on the purpose and complexity of the verification.

A CPA may request:

1. Bookkeeping Records

Up-to-date bookkeeping can help establish the business's income and expense activity for the relevant period.

2. Profit and Loss Statements

A profit and loss statement can show revenue, expenses, and resulting profit or loss.

3. Business Bank Statements

Bank statements may help support recorded transactions and deposits, although bank deposits do not automatically equal business revenue.

4. Tax Returns

Business and individual tax returns may provide historical information about reported income, expenses, and business activity.

5. Receipts and Invoices

Invoices can help support revenue, while receipts and other documentation may support certain business expenses.

6. Payroll Records

Businesses with employees may need payroll reports or related records to support wage expenses.

7. Business Accounting Reports

General ledgers, transaction reports, accounts payable records, and other accounting information may be useful depending on the verification request.

Business Expenses vs. Personal Expenses

One important consideration is the distinction between business expenses and personal expenses.

Business owners sometimes use the same bank account or credit card for both business and personal transactions. This can make financial verification more difficult because the CPA may need to determine which transactions relate to the business.

Examples of personal transactions that should generally not be presented as ordinary business expenses include:

• Personal shopping

• Household expenses

• Personal entertainment

• Non-business travel

• Personal loan payments

Accurate bookkeeping and proper separation of business and personal finances can make the verification process more straightforward.

What About Owner Draws and Contributions?

Business owners should also understand that owner draws and owner contributions are not necessarily business revenue or business expenses.

For example, when an owner takes money out of a business, that transaction may be recorded as an owner's draw rather than an operating expense.

Similarly, money that an owner contributes to the business may not represent business revenue.

The accounting treatment depends on the business structure and circumstances. A CPA can review the records and determine how such transactions have been recorded.

This distinction can be important when a third party is trying to understand the actual financial performance of the business.

How Does a CPA Verify Income and Expenses?

The process generally begins with understanding the purpose of the verification request.

Step 1: Review the Request

The business owner should provide the CPA with the exact requirements from the lender, landlord, agency, or other requesting organization.

Step 2: Identify the Reporting Period

The CPA needs to know which period is relevant.

For example, the request may concern:

• The previous tax year

• The current calendar year

• A specific month

• A year-to-date period

• Several historical years

Step 3: Review Financial Records

The CPA may review bookkeeping reports, tax returns, bank information, financial statements, and other relevant documentation.

Step 4: Compare Supporting Information

The CPA may compare the information across available records to identify discrepancies or missing information.

Step 5: Prepare the Letter

If the CPA can appropriately provide the requested information, the letter can be prepared according to the requirements and supported by the records reviewed.

Step 6: Submit or Deliver the Letter

The completed letter may be given to the client or, where appropriate, delivered according to the requesting organization's instructions.

Current Income and Expenses vs. Historical Information

A major consideration is the period covered by the CPA letter.

Historical tax returns can provide information about prior years, but a requesting organization may need more recent information.

For example, a business owner may have strong revenue in the current year even though the previous year's tax return does not reflect that recent activity.

Current bookkeeping, interim financial statements, invoices, bank records, and other documentation may therefore be relevant when a request concerns a recent period.

The CPA should clearly identify the period covered by the letter.

Can a CPA Verify Future Income or Expenses?

Generally, historical or currently documented financial information is easier to support than future projections.

A CPA may be able to discuss information based on existing records, but a letter should not be interpreted as a guarantee that a business will generate a particular amount of future income or maintain a particular level of expenses.

Future projections may require different assumptions, analysis, or documentation.

If a lender or other organization specifically requests projected income, ask what type of documentation it requires.

CPA Letter vs. Profit and Loss Statement

A profit and loss statement and a CPA letter serve different purposes.

A profit and loss statement presents financial information such as revenue, expenses, and profit or loss for a specified period.

A CPA letter may provide professional confirmation or explanation of specific financial information based on the CPA's relationship with the client and the records reviewed.

In some situations, an organization may request both.

Providing a CPA letter does not necessarily eliminate the need to submit financial statements or other supporting documents.

CPA Letter vs. Tax Return

A tax return is a formal tax filing submitted to a tax authority.

A CPA letter is a separate document that may provide information or confirmation for a specific purpose.

A tax return may contain extensive tax information, while a CPA letter can focus on the particular information requested by a third party.

For example, a lender may request a CPA letter confirming certain business income information in addition to copies of tax returns.

What Should an Income and Expense Verification Letter Include?

The exact format depends on the purpose of the letter, but it may include:

• CPA or accounting firm's name

• CPA contact information

• Client's name

• Business name

• Nature of the CPA-client relationship

• Purpose of the letter

• Relevant reporting period

• Income or revenue information

• Expense information, when appropriate

• Net income or loss, when relevant

• Description of records or information considered

• Appropriate limitations or qualifications

• Date of the letter

• CPA's signature or other required identification

The requesting organization may have its own wording or documentation requirements, so business owners should provide those instructions to their CPA before the letter is prepared.

How Can Business Owners Prepare for a CPA Letter?

Good financial organization can make the process easier.

Business owners should consider:

1. Keeping bookkeeping records current.

2. Separating business and personal transactions.

3. Maintaining business bank accounts separately.

4. Organizing receipts and invoices.

5. Keeping tax returns and supporting documents accessible.

6. Reconciling business bank accounts regularly.

7. Keeping payroll records organized.

8. Identifying the exact reporting period required.

9. Providing the CPA with the requesting organization's instructions.

10. Requesting the letter before the deadline.

If the bookkeeping records are incomplete, additional work may be necessary before the CPA can provide the requested information.

What If Your Income or Expenses Have Changed?

Businesses do not always have consistent revenue and expenses.

Seasonal businesses, growing companies, businesses experiencing expansion, and companies with changing operating costs may have significant differences between periods.

A CPA letter should accurately reflect the period and information being addressed rather than presenting a misleading impression of the business's financial activity.

If income or expenses have changed significantly, the requesting organization may ask for additional documentation.

Common Mistakes to Avoid

Business owners can encounter problems when requesting financial verification because of incomplete or inconsistent records.

Common mistakes include:

• Waiting until the deadline to request the letter

• Providing incomplete bookkeeping records

• Mixing personal and business expenses

• Confusing gross revenue with net income

• Treating owner draws as business expenses

• Treating owner contributions as revenue

• Providing the wrong reporting period

• Assuming a CPA can verify information without supporting records

• Failing to give the CPA the requester's exact requirements

• Asking for confirmation of information that the CPA did not review

Clear records and specific instructions can reduce unnecessary delays.

How Concepts CPA Can Help

For business owners who need professional assistance with bookkeeping, tax records, or financial verification, Concepts CPA can help organize and review relevant financial information and determine what documentation may be appropriate for a CPA letter.

Providing complete records and the exact requirements from the requesting organization can help make the process more efficient.

Frequently Asked Questions

Can a CPA verify both business income and expenses?

Yes, a CPA may be able to provide information about both income and expenses when the relevant records are available and the requested information falls within the scope of the CPA's professional relationship and work.

Does a CPA letter prove my business income?

A CPA letter can provide professional information or confirmation based on records reviewed by the CPA, but it is not automatically a guarantee or independent audit of every financial figure.

Can a CPA verify current-year income?

A CPA may be able to address current-year or year-to-date information when sufficient, reliable records are available. The specific requirements depend on the purpose of the letter.

Do I need a profit and loss statement?

Not always. However, a profit and loss statement may be useful when verifying business income, expenses, and net profit or loss.

Can personal expenses be included in the CPA letter?

Personal expenses generally should not be presented as ordinary business expenses. The CPA may need to distinguish personal transactions from legitimate business expenses when reviewing records.

Can a CPA verify income from self-employment?

Yes, a CPA may be able to provide information concerning self-employment income when supported by appropriate records and documentation.

How long does an income and expense verification letter take?

Turnaround time varies depending on the CPA's workload, the complexity of the request, the condition of the bookkeeping records, and how quickly the necessary documents are provided.

Can I use the same CPA letter for different organizations?

Not necessarily. Different lenders, landlords, agencies, or other organizations may have different requirements. It is best to confirm whether the existing letter meets the new request.

Conclusion

A CPA letter for income and expense verification can help business owners provide professional financial information when a third party needs more documentation than a standard income statement or tax return.

The letter may address business income, expenses, net income, self-employment information, or other financial details supported by the CPA's records and professional relationship with the client.

The best way to prepare is to maintain accurate bookkeeping, separate business and personal transactions, organize supporting documents, and provide the CPA with the exact requirements from the organization requesting the verification.

When financial records are organized and the purpose of the request is clearly defined, the CPA can better determine what information can appropriately be included in the letter.