7000 Budgeting

7122 Self-Employment Income - See 6313 for guidelines to determine if an individual is self-employed. For self-employment income, an average shall be established based on the guidelines below.

Tax Return Filed - When a tax return has been filed, the average shall be based on the most recent year's income tax return filed. Provided the return reflects a full year of self-employment earnings, a twelve-month average shall be established.

Tax Return Not Filed or Does Not Contain Full Year's Earnings - If a tax return has not been filed (e.g., employment just started or client has not filed a return) or does not reflect a full year of earnings, an initial average shall be established based on at least 3 calendar months of income which are reflective of the individual's income pattern. If the earnings reported on the tax return are representative, an average can be established based on that information dependent on the number of months reflected for the earnings reported. Otherwise, the calendar months used to establish an average must be consecutively prior to the month of application or the month in which the average is being calculated. Income must be counted by the calendar month received. An average shall exclude only the first month of earnings when that amount is not representative. (See 7110 .) A prospective estimate shall be used until an average can be instituted based on methodologies for using actual or anticipated income in 7110 . When at least 3 calendar months of income are known following use of the prospective estimate and these months reflect the individual's income pattern, an average is to be established. However, if additional calendar months are necessary to more accurately reflect this pattern, the average should incorporate these months. Once an average is established, it may continue through the review period. When income is re-averaged (e.g., review or redetermination), at least 3 of the most recent calendar months shall be used. Once again, additional months should be used if necessary to accurately reflect the person's income pattern. However, once a full year of earnings is obtained based on tax return information, a new average is to be established with this information at the time of the next scheduled review and remain in effect until the following year's tax return information is available except as indicated below. For self-employment, the average is determined by totaling all adjusted gross earnings in the months being counted and dividing by the respective number of months. The calendar months being used and the corresponding earnings must be clearly documented in the case record.

Need for New Estimate/Average Based on Changes in Income - Income shall not be calculated on the basis of prior income (i.e., income tax returns) when the individual has experienced a substantial increase or decrease in earnings. If the averaged amount does not accurately reflect the individual's actual circumstances because he or she has experienced a substantial increase or decrease in business, the self-employment income shall be calculated on anticipated earnings until a new average can be established. Self-employment earnings may also be re-averaged prior to the review period or the availability of tax return information if the current average is no longer reflective of the person's income. This can be done by either establishing a new average which incorporates the change in income pattern or an estimate until at least three calendar months of income which are reflective are known. See 9121.1 for the effective date when a change is reported.

New or Ending Self-Employment - Changes to begin or terminate self-employment or to go from self-employment to regular employment shall be made based on what is anticipated in the forthcoming month or until a representative amount can be established. If a representative amount of standard employment (converted amount) or self-employment (averaged amount) is already established and that representative amount is expected for the forthcoming month, then that amount will be applied. If a representative amount is no longer anticipated for the upcoming month, then the actual amount anticipated shall be applied in the determination.

Unearned Income - If unearned income is treated as self-employment and received on a basis other than monthly it is budgeted as intermittent income per 6213 so that income received prior to the first eligibility base shall not be considered. (See 6313 (1) ).

7122.1 Income Producing Cost Deduction (All Programs) - Prior to the application of the income disregards and deductions listed in 7211 , a standard income producing cost deduction of 25% of the gross earnings must be subtracted from the gross earnings of persons who are self-employed. Gross earnings includes the amount of any capital gains from business-related property but excludes the amount of cost of goods sold.

Capital Gains are profits realized from the sale of capital goods or equipment associated with a business. The amount of countable capital gains is determined by the following computation:

Sales Price - Purchase Price - Improvement = Profit

This calculation is different than the calculation of capital gains for income tax purposes. For examples, IRS takes into consideration depreciation that has previously been allowed.

The cost of goods sold is the amount of expenses incurred for products purchased if the business makes or buys goods to sell. Most commonly it is the cost of merchandise purchased to sell by the business or the cost of raw materials that are made into a finished product to sell. The amount of the deduction for the cost of goods sold can be determined from the current federal tax return (see 7122 (1) ). Otherwise, the cost of goods sold is determined separately from other income producing costs. If the business maintains inventory logs, the cost of goods sold is determined by adding the total value of the business’ beginning inventory and the amount of merchandise purchased to sell/manufacture. Reduce this amount by any merchandise used for personal use and the cost of the ending inventory. The result is the cost of goods sold. See Item W-1 in the Appendix - The Cost of Goods Sold Worksheet. If the business does not keep inventories, the cost of goods sold shall be determined by the actual costs associated with merchandise sold in the period.

The adjusted gross income obtained from this shall then be used to determine countable income. However, if the individual disagrees with the 25% standard deduction, he or she has the option of using actual income producing costs as a deduction from gross self-employment earnings in place of the standard deduction.

NOTE: If use of actual income producing costs are requested and are less than the 25% standard deduction, the 25% standard shall be used. In addition, the 25% standard shall be used when no actual income producing costs are reported.

Income producing costs shall include only those expenses directly related to the actual production of income. It is the responsibility of the client to provide verification of income producing costs. In using the guidelines for income producing costs, it is not the intent of DCF to pay debts, set up an individual in business, subsidize a nonprofit activity, or to treat income on the basis of IRS policies.

In determining the amount of income producing costs to arrive at the adjusted gross income, the following expenses are allowable:

The cost of inventories and supplies that are reasonable and required for the business (such as items for sale or consumption and raw materials) are to be considered as income producing costs. Also included would be costs for seed, fertilizer, and plants. NOTE: The amount of allowable inventories is determined as part of the cost of goods sold (see above). The cost of unsold inventory is not an allowable expense.

Wages and mandated costs related to wages for employees of the self-employed are to be considered as income producing costs. However, an exclusion cannot be allowed for wages paid to the self-employed person or other assistance plan members.

For non-home based operations, such items as business space and utilities can be considered as income producing costs. For home based operations, such items as shelter and utilities are not considered as income producing costs (as they are included in the basic and shelter standards) unless the items are clearly distinguishable from the home operation based on separate utility meters, separate rental costs, on the individual's income tax forms. NOTE for Food Assistance: Because the State has a mandatory standard utility allowance, there is no separate deduction for utilities for a home-based operation when using actual costs of doing business.

Property taxes and insurance payments on equipment, vehicles, or property shall be allowed if evidence is provided that such payments are directly related to the business. This includes crop insurance. Privilege taxes such as licensing fees and general excise taxes that must be paid in order to earn self-employment income including severance taxes from income derived from mineral rights (e.g., oil royalties) are allowable.

For equipment, vehicles, or property purchased on an installment plan, the actual interest paid can be considered, but that portion of the payments with which the person obtains equity (the principal) cannot be deducted. This includes the principal on mortgage payments.

Business transportation costs, rental payments on income producing equipment, cost of repairs and maintenance of equipment, and storage and warehousing charges are allowable.

Legal and professional fees.

Office expenses, including office supplies.

Advertising.

Specific items are not allowable business deductions, such as:

Depreciation on equipment, vehicles, or property is not to be considered as an income producing cost.

A loss from self-employment cannot be deducted from other income nor can a net loss of a business be considered as an income producing cost. NOTE: See special provisions for farm self-employment income loss for Food Assistance. KEESM 7122.2 .

Federal, state, and local income taxes, monies set aside for retirement purposes, and other work-related personal expenses (such as transportation to and from work) are not allowable as these are contained in the work expense deduction.

For home based operations, such items as shelter and utilities are not considered as income producing costs (as they are included in the basic and shelter standards) unless the items are clearly distinguishable from the home operation based on separate utility meters, separate rental costs, on the individual's income tax forms. NOTE for Food Assistance : Because the State has a mandatory standard utility allowance, there is no separate deduction for utilities for a home-based operation when using actual costs of doing business.

Pension and profit-sharing plans.

Employee benefit programs.

Meals and entertainment.

When at least one person has wages and at least one person is self-employed, separate calculations are required and the countable incomes are then totaled.

NOTE: If the self-employed client is not participating in work programs or earning the equivalent of the federal minimum wage per hour after six months, child care services shall be terminated at the end of the current 12-month eligibility period. To find the current minimum wage click this link, https://www.dol.gov/general/topic/wages/minimumwage , then scroll down and click on "What is the Minimum Wage?"

7122.2 Special Provisions for Farm Self-Employment Income (Food Assistance) - "See Policy Memo #99-10-05 re: "Farm Loss Provisions for Farm Owner/landlords".

If the cost of producing farm income exceeds the income derived from self-employment as a farmer, such losses shall be offset against any other countable income (earned and/or unearned) in the household. For the purpose of this provision, to be considered a self-employed farmer, the farmer must receive or anticipate receiving annual gross proceeds of $1,000 or more from the farming enterprise.

Once a loss from farm self-employment has been determined, it is first deducted from other countable non-farm self-employment income by the system. If the farm loss is greater than the amount of other self-employment earned income, the remaining loss is then deducted from any other regular earned income in the household by the system. This deduction, however, does not occur until after the earned income deduction has been applied to the gross total of regular (not self-employment) earned income. If the farm loss is still greater than the amount of regular earned income, it is then deducted from unearned income by the system.