Guide · Updated
How to Reconcile a Broker CIM with the Seller's 1120-S Tax Return
Why this check comes first
A CIM is a sales document written by the seller's broker. The tax return is what the seller reported to the IRS under penalty of perjury, and it is what an SBA lender will underwrite. If the two disagree and you build your model on the CIM, your offer, your loan size and your DSCR are all built on a number the bank won't accept.
Step 1: Get matching periods
Ask for the seller's Form 1120-S for each year the CIM covers, ideally three. If the CIM shows a trailing twelve months, ask for the year-to-date P&L as well, since there is no tax return for a partial year.
Step 2: Map each CIM line to the return
| CIM line | Form 1120-S | Why they often differ |
|---|---|---|
| Revenue | Line 1a, gross receipts or sales (and 1c after returns) | Accrual vs. cash timing, a trailing-twelve-month CIM vs. a calendar-year return, or revenue the books show but the return doesn't. |
| Cost of goods sold | Line 2, with the detail on Form 1125-A | Labor or depreciation moved between COGS and operating expenses, or inventory adjustments. |
| Owner compensation | Line 7, compensation of officers | Usually ties. If not, ask what else the owner was paid through payroll or distributions. |
| Salaries and wages | Line 8 | Family members on payroll, or contractors the CIM shows elsewhere. |
| Rent | Line 11 | Related-party rent. If the seller owns the building, check the rent against market. |
| Interest | Line 13 | Added back to get EBITDA. Should tie closely. |
| Depreciation | Line 14, plus Form 4562 and anything in COGS | Bonus depreciation can make taxable income look low in one year. |
| Net income | Ordinary business income (loss), bottom of page 1 | The CIM's figure often already includes add-backs. Compare it with taxable income before any adjustments. |
Schedule L on the same return gives you the balance sheet, which you will need later for the working capital peg.
Step 3: Calculate the gap and sort it
For each line, subtract the tax return figure from the CIM figure and divide by the tax return figure. Then sort:
- Ties: under 0.5%. Rounding.
- Review: 0.5% to 2.5%. Ask, but it rarely changes the deal.
- Flag: above 2.5%. Get a written explanation before you rely on the CIM.
An example
In our fictional sample deal, the CIM shows revenue of 8,420,000 while line 1a of the 1120-S shows 8,195,300, a gap of 2.7%. Net income in the CIM is 1,095,000 against ordinary business income of 932,830. The broker's adjusted EBITDA is 1,690,000; rebuilt from the return with documented add-backs it is 1,425,330. That difference of 264,670 is worth roughly 1,114,142 of purchase price at the same multiple.
Step 4: Send the broker one list
Put every flag into one written list. Good questions are specific and checkable:
- “CIM revenue is 2.7% above line 1a for 2024. What makes up the difference, and can you share the bridge?”
- “Which add-backs are already included in the CIM's net income?”
- “Is any rent paid to an entity the seller owns? What is the lease term?”
Then rebuild the earnings
Once the gaps are explained, build adjusted EBITDA up from the tax return, add-back by add-back, and test whether it can carry the loan with the SBA DSCR calculator.
Frequently asked questions
Why doesn't the CIM match the tax return?
Common reasons are a different period (trailing twelve months vs. calendar year), cash vs. accrual accounting, expenses moved between categories, and adjustments already baked into the broker's figures. Some gaps are innocent; the point is that each one has an explanation you can verify.
Which number should I trust, the CIM or the tax return?
Lenders underwrite SBA loans from the tax returns. Treat the return as the starting point and make the broker explain every difference, in writing, before you sign an LOI.
How much variance is normal?
As a rule of thumb, gaps under about 0.5% are rounding, 0.5% to 2.5% are worth a question, and anything larger should be explained before you rely on the CIM's earnings. These are screening thresholds, not accounting standards.
What if the seller files a 1065 or Schedule C instead of an 1120-S?
The method is the same: map each CIM line to the matching line on the partnership return (Form 1065) or Schedule C, then explain every gap. Line numbers differ, so map them carefully.
Is this the same as a quality of earnings report?
No. A reconciliation is a fast screen before an LOI. A quality of earnings (QoE) report is a deeper review by an accounting firm, usually done after the LOI and before closing.