1100 Self-employment Income

The procedures for handling income received from boarders by a household that does not own and operate a commercial boardinghouse are described in Section 1101. For all other households receiving self-employment income, including those households that own and operate a commercial boardinghouse, the county department shall calculate the self- employment income in accordance with the policies in the section. Self-employment is working for oneself, rather than for an employer. Self-employment for food assistance purposes involves a business, job, or enterprise which an individual or individuals work for gain or profit, rather than wages or salaries paid by an employer. Self-Employment Businesses 1. The income and resources of an unincorporated business are treated as the self- employment income and resources of the proprietor. 2. The income and resources of a partnership are treated similarly with each partner receiving a proportionate share of the partnership income and resources. S Corporations and Other Corporations 1. S Corporations are closely-held family corporations in which income from such is reported together with other household income on its tax return. S Corporations are “pass through” entities for tax purposes. The income of these companies are passed through to their owners and reported on the owners’ personal income tax returns. Income from an S Corporation is counted as earned income, but it is not treated as self-employment. Owners of S Corporations are considered employees of the corporation and; therefore, cannot be considered as self-employed. Because they are not considered self-employed, they are not entitled to the exclusion of certain costs of producing self-employment income (40% standard deduction). In an S Corporation only the salary paid to the employee-owner is subject to employment tax. For those households who have an S Corporation, only the income as reported on the household’s income tax return, form 1040, for the S Corporation is budgeted as earned income and annualized over a 12-month period. The salary and withdrawals for household expenses made from the S Corporation, including earnings from the company, salary, and withdrawals is subject to a 20% earned income deduction. If the household reports a net loss, the income attributed to the food assistance household would be zero since net losses may not be used to offset other income. Losses experienced by employees of S Corporations must not be offset against other countable income in the household. The income of other types of corporations is income to the shareholder only if it is distributed to the shareholder. Any cash or expenses paid to or for the household from corporate funds should be considered “distributions” and counted as income. 2. Corporate assets for any corporation should be clearly registered in the name of the corporation to receive an exclusion from the household’s resource determination. Otherwise, these would be considered property of the household and counted or excluded as appropriate according to the provisions found in Chapter 8. Additionally, the value of the stock which represents the value of non-income producing corporate property is considered a resource to the stockholder. A. Annualizing Self-employment Income Self-employment income may be received irregularly or on a regular basis and is handled as follows: 1. Self-employment income which represents a household’s annual income shall be annualized over a 12 month period even if the income is received within only a short period of time during those 12 months. For example, self employment income received by farmers shall be averaged over a 12-month period, if the income is intended to support the farmer on an annual basis. If the averaged annualized amount does not accurately reflect the household’s actual circumstances because the household has experienced a substantial increase or decrease in business, the county department shall calculate the self-employment income on anticipated earnings. The county department shall not calculate self-employment income on the basis of prior income (e.g., income tax returns) when the household has experienced a substantial increase or decrease in business. 2. Self employment income which is received on a monthly basis but which represents a household’s annual support shall normally be averaged over a 12 month period. This self- employment income shall be annualized even if the household receives income from other sources in addition to self-employment. If, however, the averaged amount does not accurately reflect the household’s actual monthly circumstances because the household has experienced a substantial increase or decrease in business, the county department shall calculate the self-employment income based on anticipated earnings. 3. Self-employment income which is intended to meet the household’s needs for only part of the year shall be averaged over the period of time the income is intended to cover. For example, self-employed vendors who work only in the summer and supplement their income from other sources during the balance of the year shall have their self-employment income averaged over the summer months rather than a 12-month period. Determining the Period of Time Self-Employment Income is Intended to Cover In an effort to determine if the self-employment income which is received other than on a regular monthly basis is intended to support the household on an annual basis, other factors, in addition to the household’s own statement, could provide some indication as to how long the household could sustain itself on such income would have to be examined and evaluated. Such factors would include, but would not be limited to, previous year’s business and personal expenses, tax records, anticipated expenses for the current year, income received from other sources during the previous year, income during the coming year, and so on. Such factors, when compared with the income from seasonal self-employment, would provide a basis for making a determination as to how long the income is intended to support the household. For example, if the previous year’s expenses were proportionate to the household’s income from self-employment, it could be an indication that the income would sustain the household for a year. Therefore, the household’s income could be annualized. If expenses were not proportionate with the income, it could be assumed that such income could not sustain the household for a year; therefore, income would be averaged over the period of time for which such income is received. Although the period of time for which the income is intended to cover would be a factor in determining the length of the household’s certification period, all household circumstances would have to be evaluated. Additionally, although information obtained by the household would provide some indication as to the appropriate certification period to be assigned, the responsibility for establishing the appropriate certification period remains that of the county department. New Self-Employment Enterprises If a household’s self-employment enterprise has been in existence for less than a year, the income from that self-employment enterprise shall be averaged over the period of time the business has been in operation, and the monthly amount projected for the coming year. However, if the business has been in operation for such a short time that there is insufficient information to make a reasonable projection, the household may be certified for less than a year until the business has been in operation long enough to base a longer projection. Termination of Self-Employment When a self-employed household whose income and expenses have been annualized and prorated over a 12-month period goes out of business, the county department must remove the prorated income from the food assistance budget when the last income is received from that source. For example, a farmer reports that he plans to stop farming and expects to sell his last crop in October. The sale of the crop has previously been anticipated and the income had already been included in the averaged amount. The averaged amount would be counted for October. No self-employment income would be counted for November. 1. If the household is expected to receive residual income after the person stops being actively engaged in the self-employment enterprise, the county department must calculate the residual self-employment income based on anticipated amounts. The income can either be counted in the month it is anticipated to be received or the county department can average the income forward over the certification period. 2. When the self-employment income is no longer counted in the food assistance budget, the self-employment expenses are no longer allowed, even if they continue to be incurred. B. Determining Monthly Income from Self-Employment For the period of time over which self-employment income is determined, the county department must add all gross self-employment income (including capital gains); divide the gross self-employment income by the number of months over which the income will be averaged. This is the amount to be shown on the DHR-FAD-1139. The households with self-employment income are entitled to a standard deduction of 40% of the gross proceeds from the self-employment income as a cost of doing business. This procedure is automated. For those households whose self-employment income is not averaged but is instead calculated on an anticipated basis, as noted in Item A of this section, the county department must: 1. Add any capital gains the household anticipates it will receive in the next 12 months, starting with the date the application is filed. 2. Divide the amount by 12. This amount shall be used in successive certification periods during the next 12 months, except that a new average monthly amount shall be calculated over this 12-month period if the anticipated amount of capital gains changes. 3. The monthly anticipated average of capital gains as determined above shall then be added to the anticipated monthly self-employment income. Households with self-employment income are entitled to standard deductions of 40% of the gross proceeds from the self-employment income as a cost of doing business. This procedure is automated. Other Household Income and Self-Employment Income The monthly net self-employment income shall be added to any other earned income received by the household. The total monthly earned income, less a 20% earned income deduction, shall then be added to all monthly unearned income averaged by the household. (This process is handled by automation.) Special Provision for Farmers For purposes of this provision, to be considered a self-employed farmer, the farmer must receive or anticipate receiving annual gross proceeds of $1000 or more from the farming enterprise. A fisherman is treated the same as a self-employed farmer if the fisherman is self-employed and receives or anticipates receiving annual gross proceeds of $1,000 or more from fishing. This applies even if the fisherman is only involved in catching or harvesting the fish as well as watermen, crayfishermen and other type fishermen. When the Secretary of Agriculture determines that a farm emergency exists due to a natural disaster, any payments to farmers pursuant to such a determination shall be excluded from income and resources for food assistance purposes. This exclusion is required by Section 312(d) of the Disaster Relief Act of 1974, as amended in 1988. Certain Farm Payments 1. Agricultural Stabilization and Conservation Service (ASCS) cash payments including payments for crop losses are counted as earned self-employment income except when such payments are for loans. Farm loans are excluded from income for food assistance purposes. 2. Payments from the Federal Crop Insurance Corporation (FCIC) are considered recurring lump-sum payments, and as such they are considered as resources. 3. Crop insurance settlements from private companies which are made as a nonrecurring lump sum payment are counted as a resource. Termination of Farm Self-Employment Income When a farm self-employment household whose income and expenses have been annualized and anticipated over a 12-month period, discontinues farming, the county department shall remove the farm self-employment income from the budget in accordance with the appropriate reporting and processing time frames for changes. Annualized farm self-employment income that had been prorated as income from the budget due to termination of self-employment would lose its resource exclusion. However, any property or vehicles essential to farm self-employment of a household member engaged in farming is excluded as a resource for one year from the date the household member terminates farm self- employment. C. Capital Gains The proceeds from the sale of capital goods or equipment shall be calculated in the same manner as capital gains for Federal income tax purposes. However, even if 50% of the proceeds from the sale of capital goods or equipment are taxed for Federal income tax purposes, the State agency shall count the full amount of the capital gain as income for food assistance purposes. Recaptured Depreciation The Internal Revenue Service (IRS) allows self-employed persons to deduct depreciation as a cost of doing business. Then, when a piece of equipment, for instance, is sold before the end of its useful life, the former owner must declare a portion of depreciation as income. This is commonly referred to as recaptured depreciation. Recaptured depreciation is NOT counted as income for food assistance purposes. Recaptured Investment Credit IRS allows for a percentage of certain investments to be deducted as an expense. If the asset is disposed of or ceases to be eligible before the end of the recapture period for recovery property or before the end of the estimated life used to figure the credit, a percentage of the credit may have to be recaptured. This is commonly referred to as recaptured investment credit. Recaptured investment credits are NOT counted as income for food assistance purposes. D. Allowable Costs of Producing Self-Employment Income Households with self-employment income are given a standard deduction of 40% of the gross proceeds from self-employment income for operating expenses as a cost of doing business. The standard will be used for all food assistance households reporting self-employment income. This procedure is automated. E. Assigning Certification Periods Households that receive their annual support from self-employment and have no other source of income may be certified for up to 12 months. For those households that receive other sources of income or whose self-employment income is intended to cover a period of time that is less than a year, the county department shall assign a certification period appropriate for the household’s circumstances. For those self-employed households that receive their annual income in a short period of time, the initial certification period shall be assigned to bring the household into the annual cycle. For example, the county department may provide for recertification at the time the household normally receives all or a majority of its annual income or the State agency may prefer to have the annual cycle coincide with the filing of the household’s income tax. F. Special Instructions for Farmers in USDA Payment-in-Kind (PIK) Program The following policy establishes the procedures for handling grain received by farmers under the new Payment-In-Kind (PIK) Program. Under this program, farmers who have already taken portions of land out of production under the Land Diversion or Acreage Reduction Programs will be encouraged to take more land out of production. Farmers who enroll will receive surplus grain which can be retained for their own use or sold. Rice and upland cotton, as well as wheat, corn and sorghum are involved in PIK program. Grain received under this program should normally be considered self-employment income. It should be included when annualizing income if the household indicated the grain will be sold during the year. It should be noted that no income is in fact realized by the household until the commodities are sold. Indeed, farmers receiving PIK payments from the Commodity Credit Corporation (CCC) will incur no Federal income tax liability until sale of the commodities occurs. However, the Food Assistance Program regulations provide for a process of annualizing to be used when certifying self-employed households, such as farmers. PIK commodities, like any other product of the farm enterprise, should be included as part of annual income if their sale may be reasonably anticipated during the year for which income is being calculated. This process allows self-employed households to have certification periods that reflect the uneven time frames in which their income is generated. It should also be noted that in many cases farmers will sell commodities they own to CCC and receive them back from CCC as PIK commodities. Farmers will be paid by CCC for the commodities with the payment being used to repay price support loans previously extended to the farmer by CCC. These sales and loan repayments should be treated as completely separate from the receipt of PIK commodities and handled in the same manner as any other sale of commodities and repayment of a price support loan. The value of any grain which the household intends to use for feed or seed would not be considered a resource. In those instances where the household intends to retain the grain without sale longer than 12 months, it should be considered a non-liquid resource. It should also be noted that farmers who qualify for PIK grain and are already storing grain under a CCC loan will be allowed to divert for personal use the amount of PIK entitlement from their own storage, and will be released from any obligation for that amount of grain. PIK grain should be considered as described above whether diverted from the farmers own storage or received from the CCC.