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Example Ms. Rodell operates a retail store. Total proceeds for the month are $3,200. Allowable expenses for the mortgage interest, property tax, insurance, utilities, and goods purchased at wholesale total $3,800. The $600 deficit cannot be used to offset any other group income. Deduct the following allowable expenses from the gross proceeds of self-employment income: • identifiable expenses of labor, stock, and raw material; • payments on the principal of the purchase price of income-producing real estate and capital assets, equipment, machinery, and other durable goods; • interest, but not the principal, on loans for equipment, real estate, or income-producing property; • insurance premiums on equipment, real estate, and other income-producing property. • taxes paid on income-producing property; • transportation costs while on the job (such as fuel) but not routine transportation to and from work; • cost of goods sold, supplies, and materials; • advertising costs; • accounting and legal fees; • professional licensing fees and union dues if necessary to practice a profession or trade; • costs of maintaining a place of business such as rent and utilities. If a business is operated in the home, only the utilities associated with the business may be allowed and not the utilities incurred by the home; and. • any other identifiable expenses of producing self-employment income. Do not deduct the following from self-employment income: • depreciation on equipment, real estate, or other capital investments; • a net loss from a previous period; • federal, state, and local income taxes; • personal entertainment or other personal business expenses; • money set aside for retirement; • the purchase of capital equipment; or • any amount that exceeds the payment a household receives from a boarder for lodgings and meals. While allowable expenses (which are subtracted from gross self-employment income) cannot generally exceed proceeds, allowable expenses of farming can exceed the proceeds if the actual or anticipated proceeds are $1,000 or more for the year. This farm loss can then be deducted from other income as follows: • Deduct the net farm loss from any other self-employment income of the group. • If a net farming loss remains, deduct it from any other countable income of the group, after the earned income deduction has been applied, and • The previous year's tax return is the usual basis to calculate the farming income. Prorate the loss over the year to determine a monthly amount to apply to the other income sources. Generally, self-employment income is annualized, also known as averaged, over a 12-month period. This is done by dividing annual self-employment income by 12. This is done to "smooth" the income fluctuations of self-employed individuals.