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Page | 159 8701.6 Exceptions to the 55% standard expense deduction The following types of income are not allowed the 55% standard expense deduction. The self- employment returns for these types of income will be calculated by designated staff within each region.

A. Partnership income B. Capital gains and/or losses C. Corporation Income – is budgeted as unearned and annualized dividend income. D. Rental Income - is considered unearned self-employment (if the household is not working at least 20hrs/wk.)

8701.7 Calculating Self-Employment Income When No Expenses Are Budgeted or the Household Requests Actual Expenses be Budgeted

Designated staff in each region will calculate self-employment income if they report no business expense or request actual expenses be used. When this occurs, the business forms, shelter verifications, and household contact information should be sent to the regional staff for that area. Email or fax the information to them as soon as possible so that the calculations may be completed in a timely manner.

Once the information is sent for calculations, the regional contact will complete the calculation, update the BUSI panels, and return the information to the EABS to complete the case. If there is a possibility that the case is expedited, it is important to get the self-employment information to the regional contact as quickly as possible as there are several steps they must go through to calculate the income.

If ledgers are completed rather than an income tax return, these self-employment cases are completed in the local office by the EABS. Use the Self Employment tool to determine if the standard deduction or actual expenses will be used to determine the income.

8701.8 Depreciation Depreciation is not allowed as a cost of doing business; it is counted as income. Recaptured depreciation is not counted as income but may be considered in the capital gain computation of capital goods or equipment.

A farmer must recapture depreciation when a capital item is sold prior to the end of its useful life.

8701.9 Self-Employment Deductions From Gross Income

Determine net income from self-employment by deducting from gross income any identifiable costs of doing business. Examples of identifiable costs of doing business are the costs of labor, stock, raw material, equipment, capital assets, property, seed and fertilizer, and insurance premiums. Self- employment losses must be deducted from other self-employment gains. Farm/ranching losses must first be deducted from another self-employment income and then may be deducted from any other household income. The farm/ranching loss must be current, not from previous tax years.

Example: Farmer buys a combine. IRS states the combine has a useful life of six years. However, IRS requires that the combine be fully depreciated over a three year period. Should the combine be sold prior to the end of its useful life, a portion of the depreciation must be recaptured or declared as income. Although the recaptured depreciation results from the sale of a capital asset, it is treated as ordinary income by IRS rather than capital gains income and counted at 100% value by the IRS. Recaptured depreciation appears on the face of the 1040 and is backed up by the 4797.