OBSOLETE POLICY CHIP MANUAL |
Effective January 1, 2011
A self-employed individual actively earns income directly from his own business, trade or profession, rather than as salary or wages from an employer. A self-employed individual may be the sole owner of a business; a general partner in a partnership; a member of a Limited Liability Company being taxed as a partnership; or a shareholder in an S Corp who is actively engaged in the operation of the business. (See section 401-2 for an explanation of these types of businesses).
A self-employed farmer actively earns income from operating a farm for profit either as owner or tenant. A farm includes stock, dairy, poultry, fish, bee, fruit, or truck farms. It also includes plantations, ranches, nurseries, or orchards.
An individual is NOT self-employed if the business is incorporated; if the individual is a limited partner in a Limited Partnership or in a Limited Liability Partnership; or if the individual is a member (owner) of a Limited Liability Company which files federal income taxes as a corporation. In these situations, any earned income actually received by the client as an employee of the business is countable wages. Dividends or the share of income reported by the individual on his individual income tax is countable unearned income.
Self-employment income is different from rental income because rental income is not always earned. An individual who does not do anything except collect the rent is not self-employed. See Sec. 402-9 for more information about rental income.
1 What is countable Self-Employment Income?
An individual’s countable self-employment income from a business depends on the type of business and the individual’s relationship to the business with one exception. At renewal, if a CHIP household with no other program open opts to use their Adjusted Gross Income (AGI) provided through the Utah State Tax Commission interface, the type of business does not matter. No further verifications or additions to the self-employment income are needed. (See section 704-9.)
A. Sole Proprietor (See Section 401-2 #1): If the individual is the sole owner of the business, the individual’s countable self-employment income is the profit from a business or farm. Profit is the total gross earnings minus allowable business expenses.
B. General Partner (See Section 401-2 #2.): If the individual is a general partner, the individual’s self-employment income is his share of the total profit from the partnership. Read the partnership agreement to determine their share of the profits and divide the profits according to the agreement. If no partnership agreement exists, divide the profits equally among all general partners.
EXAMPLE #1: Mr. Jones is one of three general partners in "Us Guys and Sons". The total profit of the business is $2500 a month. The business has a written partnership agreement which says Mr. Jones is entitled to 75% of the profits. Mr. Jones' countable self-employment income is $1875. (75% of $2500 = $1875)
EXAMPLE #2: Mr. Miller is one of four partners “Miller’s Ski Shack”, a business with a total monthly profit of $1600. The business does not have a partnership agreement. Mr. Miller's countable self-employment income is $400. (1/4 of $1600 = $400)
C. Shareholder in an S Corporation (See Section 401-2 #4A): If the individual is a shareholder in an S Corporation and is actively engaged in the business, the individual’s self-employment income is his share of the profits. An individual who is a shareholder in an S Corporation but is not actively engaged in the business is not self-employed. Their share of the profits is countable unearned income. (See Section 401-2 #4A)
EXAMPLE#1: Mr. Smith is one of 12 shareholders in “John’s Cleaning Service”, an S Corporation with a monthly profit of $12,000. Mr. Smith formed the corporation, is responsible for its management, and cleans several of the businesses that have contracted with them for services. Mr. Smith’s countable self-employment income is $1,000. ($12,000 / 12 = $1,000)
EXAMPLE #2: Mr. Manning is one of 10 shareholders in “Mike’s Investigations”, an S Corporation with a monthly profit of $11,000. Mr. Manning does not perform any services for the Corporation. His share of the monthly profits, $1,100, is countable unearned income. ($11,000 / 10 = $1,100)
D. Member of a Limited Liability Company (LLC) Filing Federal Taxes as a Partnership (See Section 401-2 # 3): If the individual is a member of a Limited Liability Company which files federal taxes as a partnership and the individual is a general partner, the individual’s self-employment income is his share of the profits.
If the individual is a limited partner, he is not self-employed. Any income he receives for services he performs are countable wages. Any dividends paid to him from the LLC are countable unearned income. (Follow the rules in Section 401-2 #2B to determine countable income)
EXAMPLE #1: Ms. Mitchell is one of 3 members of “Styles & Files” a LLC with monthly profits of $900. The Operating Agreement says the income of the LLC is taxed as a partnership with each member receiving an equal share of the profits. Ms. Mitchell’s countable self employment is $300.
EXAMPLE #2: John Deere, and his son have formed a LLC and are the only 2 members of “John’s Tractor Service”. The Articles of Organization state that the income of the LLC will be taxed as a partnership, that John is a limited partner, and that he is responsible for the management of the LLC. Even though the profits of the LLC are taxed as a partnership, because he is a limited partner, he is not self-employed. Any money he receives as payment for his management duties is countable wages.
2 How to Determine Countable Self-Employment Income:
Use the individual’s most recent income tax return to determine the countable profits from self-employment or farming if the income on the tax return is representative of the current self-employment income and circumstances. (See 410 #4).
If a tax return is not available, or if the income reported on the most recent tax return is not representative of current income, compute countable self-employment income by determining the gross income (in cash or in-kind) received or available to the client and then deducting the allowable business or farm expenses. DO NOT include money earned but not yet received. DO NOT count any income twice.
EXAMPLE #1: Mr. Smith sold $1200 worth of merchandise to Mr. Jones on January 31. Since Mr. Jones is a steady customer, Mr. Smith let him have the merchandise that day and agreed to send him an itemized bill as soon as possible. Mr. Jones did not pay for the merchandise until March 3. The money received from Mr. Jones must be counted as income received in March. It cannot be counted as income any earlier than March.
EXAMPLE #2: Mr. Martin repaired Mr. Hill's roof in June. He finished the work June 30 and was told he could pick up the check that day at Mr. Hill's office. He did not pick up the check until July 5. The check must be counted as income received in June.
EXAMPLE #3: Ms. Miller repaired Ms. Hill's car in August. Ms. Hill and Ms. Miller agreed that payment would not be made in cash. Instead, Ms. Hill would give Ms. Miller a pot-belly stove which they agreed was worth the $150 Ms. Miller would usually charge for this kind of work. Ms. Miller could take the stove immediately but she decided not to take it until winter. The $150 payment in-kind must count as earned income in August.
3 What are Allowable Business and Farm Expense Deductions?
Some expenses the client may claim are business expenses are not allowable. They include (1) payments on the principal of the purchase price of income-producing real estate and capital assets such as equipment, machinery and other durable goods; (2) expenses and net losses from previous periods; (3) federal, state and local income taxes; (4) money set aside for the individual’s retirement and other work related personal expenses such as transportation to and from work or personal entertainment expenses; (5) repayment on the principal of a bank loan; and (6) debts from a previous business, including bankruptcy payments
An individual may elect to have 40% of the gross Self-employment income deducted for business expenses. If the individual chooses this option, it is not necessary to verify actual expenses.
If business expenses are more than 40%, the individual may choose to verify actual expenses. If the individual chooses this option, allow any business expenses that are allowed by the IRS. See 410-2 #4 for information on how to use income tax forms to determine current countable self-employment income.
A. Self-Employment Expenses (Non Farm):
1) Advertising - Amounts paid for advertising and promotional fees.
2) Bad Debts - Bad debts are mainly the result of credit sales to customers. They can also be the result of loans to suppliers, clients, employees, or distributors. A bad debt may be claimed if the income that the debt represents is definitely known to be worthless.
3) Car and Truck Expenses - If the vehicle is used for personal use and for the business, the client must declare the percentage of mileage used for business. Allow the same percentage of all expenses related to the vehicle.
a. Standard Mileage Rate - Rather than using actual expenses, the individual may choose a standard mileage rate of 32.5 cents a mile for vehicle expenses. In order to use the standard rate, the individual must have owned the vehicle and used the standard mileage rate for the first year it was placed in service. If the vehicle was leased they must have used the standard mileage rate for the entire lease period. (The standard rate is not allowed if the car is used for hire or if they operate two or more cars at the same time.)
b. For those who do not use the standard mileage rate, the business portion of expenses for gasoline, oil, repairs, insurance, tires, parking fees, rental fees, garage rent, license plates, etc. are allowable. Also allow a deduction for vehicle registration, prorated for 12 months.
DO NOT allow a deduction for payment on the principal for the purchase of the vehicle. DO NOT allow a deduction for a payment for leasing the vehicle if the payment may also be applied towards purchase of the vehicle. DO NOT allow costs of driving the car or truck between home and the main regular workplace.
EXAMPLE #1: Mr. Jones owns a small truck, which has been adapted for use in his business. He uses the truck only for business. Allow the standard mileage rate or deductions for all gas and oil expenses and for vehicle registration, prorated over the year. If Mr. Jones pays for vehicle repairs, allow deductions for the repairs in the month the repairs are made. Do Not allow deductions for work done on the truck to adapt it for work or to improve it, only to keep it running properly and safely.
EXAMPLE #2: Mr. Smith has a small business in an isolated area of Utah. He must travel 50 miles from his home to his business. He has no other business need for his car but it is crucial for him to own a vehicle because public transportation is not available. Do Not allow a deduction for any costs associated with this vehicle because it is not used regularly for his business.
EXAMPLE #3: Mrs. Miller has a small van which she uses for her day care business. The van is also used as a second family car. Mrs. Miller must declare the percentage of mileage used for business. She says 50% of the total mileage on the van is for business. Allow deductions for 50% of the total expenditures for gas, oil, repairs, registration, insurance, and the interest on the loan to buy the van.
4) Commissions and Fees
5) Depletion - Depletion is the using up of natural resources by mining, quarrying, drilling or felling. Individuals who have an economic interest in mineral property or standing timber may deduct the cost of using up those natural resources
6) Depreciation - Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property which has a useful life beyond one year. It includes improvements made to leased business property. Stock in trade, inventories, or land are not depreciable.
7) Employee benefit programs - Contributions to employee benefit programs that are not a part of a pension or profit sharing plan. Examples are accident and health plans, group-term life insurance, and dependent care assistance programs. Do Not allow these expenses for contributions made into these plans for the self-employed individual.
8) Insurance - Premiums paid for insurance related to the trade or business. This includes fire, theft, flood or other similar insurance, merchandise and inventory insurance, and liability insurance.
9) Interest - Interest paid to banks or other financial institutions for a mortgage on real property used in the business that is not the client’s home or the home of any partner in the business. Do not allow a deduction for bills owed but not paid. Do not deduct interest paid or accrued on debts allocable to investment property. Do not allow any deduction for payment on the principal for any land or business. If the property being purchased is a vehicle, see the rules for Car and Truck Expenses, Section 410-2 -3A, #(3)
a. Business Use of a Home - NOT Day Care
If the business is operated in a home of the client or the client's partner, determine the percentage of the home that is used regularly and exclusively for business purposes. Do NOT include any part of the home that is used for both living space AND for business. Allow the same percentage of the costs associated with the home.
EXAMPLE #1: Mrs. Jones operates a beauty salon in her home. 1/4 of the home is used ONLY for the beauty salon; she does not use this part of her home for personal use. Rent is $520 a month. The allowable business deduction is 1/4 of $520, which is $130.
EXAMPLE #2: Mr. Block operates an accounting business in his home. He has a room that he uses as an office. He also uses the room for his personal sleeping quarters. Even though the room is used primarily for business, it is also used as part of his home. DO NOT allow a deduction for business use of the home.
b. Business Use of a Home - Day Care
If the day care business is operated in a home of the client or the client's partner, determine the percentage of the home that is used on a regular basis for business purposes. It is not necessary for any portion of the home to be used exclusively for business. Allow the same percentage of the costs associated with the home.
EXAMPLE: Ms. Mason offers day care in her home. 1/3 of the house is used regularly for this purpose: the kitchen, the dining room, a room for the children to take naps, the bathroom, a room to play in, etc. Although these rooms are also used for personal use, 1/3 of the costs are allowable. Ms. Mason pays a mortgage payment of $600 (all interest), and homeowners insurance of $84. The allowable deduction is 1/3 of $684 which is $228.
10) Legal and Professional services - Legal and professional fees that are ordinary and necessary expenses directly related to operating the business. The cost of tax advice related to the business and for preparation of the tax forms related to the business are included.
11) Office Expenses - Expenses paid as operating costs of an office. DO NOT include purchases of office furniture or equipment (these are capital expenditures.)
12) Pension and profit sharing plans - Contributions made to pension, profit-sharing, or annuity plans for employees of the business. DO NOT include contributions made for the self-employed individual.
13) Rent or leases - Amounts paid for the use of property rented or leased for the business.
14) Repairs and Maintenance - Amounts paid for repairs and maintenance to property that does not add to the value or increase the life of the property. DO NOT deduct amounts spent to restore or replace property (these are capital expenses.)
15) Supplies - Supplies and materials used in the business. DO NOT include inventory that is maintained for sale.
16) Taxes and licenses - Taxes paid by the business. This includes state and local sales taxes imposed on the individual as the seller of goods or services; real estate and personal property taxes on business assets; licenses and regulatory fees for the trade or business paid each year to state or local governments; Social Security and Medicare taxes paid to match required withholding from the employees’ wages; federal unemployment taxes; and federal highway use taxes.
DO NOT allow federal income taxes, including the individual’s self-employment tax; taxes assessed to pay for improvements, such as paving and sewers; State and local sales taxes on property purchased for use in the business; and other taxes and license fees not related to the business.
17) Travel, meals, and entertainment - Expenses for lodging and transportation connected with overnight travel, if they are directly related to or associated with the active conduct of the trade or business. DO NOT allow expenses paid or incurred for a facility (such as a yacht or hunting lodge) used for any activity usually considered entertainment, amusement or recreation. DO NOT deduct amounts paid or incurred for membership dues in any club organized for business, pleasure, recreation or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs.
18) Utilities - Utility expenses for the trade or business
a. Business NOT in a Home
All utility payments made, including telephone, are allowable deductions for a business that is NOT run in the client's home or the home of any partner in the business. The payment is an allowable deduction in the month the payment is made.
b. Business in the home of a Client or Client's Partner
If the business is operated in the home of the client or the client's partner, determine the percentage of the home that is used on a regular basis for business purposes. Allow the same percentage of the utility costs, EXCEPT for the telephone, associated with the home.
If there is more than one telephone in the home, allow the full amount paid for any additional telephone (s) listed in the phone book AS BUSINESS PHONES. If there is only one telephone or if no additional phone is listed in the phone book as a business phone, allow deductions only for specific telephone calls identified by the individual as business calls. Allow the deductions in the month the bill is paid.
EXAMPLE #1: Mrs. Jones operates a beauty salon in her home. She has one telephone in her home. She cannot identify any specific calls on the bill that are business-related so none of the phone bill is allowed as a business expense.
EXAMPLE #2: Mrs. Mason offers day care in her home. She has two telephones in her home; one personal phone and one listed as a business phone. Allow a deduction for the entire bill for the business phone.
19) Wages - Wages paid to employees of the business. DO NOT include salaries or wages paid to the self-employed individual.
20) Other Expenses - Donations to business organizations, licenses and regulatory fees, subscriptions to trade or professional publications.
B. Farm Expenses
1) Car and Truck Expenses - If the vehicle is used for personal use AND for farming, the individual must declare the percentage of mileage used for farming. Allow the same percentage of all expenses related to the vehicle.
a. Standard Mileage Rate - Rather than using actual expenses, the individual may choose a standard mileage rate of 32.5 cents a mile for vehicle expenses. In order to use the standard rate, the individual must have owned the vehicle and used the standard mileage rate for the first year it was placed in service. If the vehicle was leased they must have used the standard mileage rate for the entire lease period. (The standard rate is not allowed if the car is used for hire or if they operate two or more vehicles at the same time, such as fleet operations.)
EXAMPLE: Mr. McDonald owns a car and a pickup truck that are both used in his farm business. His farm employees use the truck and he uses the car for business. Mr. McDonald cannot use the standard mileage rate for the car or the truck. This is because both vehicles are used in Mr. McDonald’s farm business at the same time. He must use actual expenses for both vehicles.
b. For those who do not use the standard mileage rate, the business portion of expenses for gasoline, oil, repairs, insurance, tires, parking fees, rental fees, garage rent, license plates, etc. are allowable. Also allow a deduction for vehicle registration, prorated for 12 months.
DO NOT allow a deduction for payment on the principal for the purchase of the vehicle. DO NOT allow a deduction for a payment for leasing the vehicle if the payment may also be applied towards purchase of the vehicle.
2) Chemicals
3) Conservation Expenses - Deductible soil and water conservation expenses generally are those that are paid to conserve soil and water or to prevent erosion of land used for farming. These expenses include (but are not limited to) the cost of leveling, grading and terracing, contour furrowing, the construction, control, and protection of diversion channels, drainage ditches, earthen dams, watercourses, outlets and ponds, the eradication of brush, and the planting of windbreaks. This deduction may not exceed 25% of the gross income from farming.
4) Custom Hire (Machine Work) - Amounts paid for custom hire or machine work (the machine operator furnished the equipment). DO NOT include amounts paid for rental or lease of equipment that the farmer operated himself.
5) Depreciation - Depreciation is the annual deduction allowed to recover the cost or other basis of buildings, cars and trucks, machinery, and other farm equipment which have a useful life beyond one year. It includes improvements made to leased business property. Depreciation on the home, furniture or other personal items, land, livestock bought or raised for resale, or other property in inventory are not depreciable.
6) Employee Benefits - Contributions made to employee benefit programs that are not an incidental part of a pension or profit-sharing plan (See Section 410-2 B #(14) for expenses related to pension and profit sharing plans.) Examples are accident and health plans, group-term life insurance, and dependent care assistance programs. DO NOT deduct any contributions made on behalf of the farmer to an accident and health plan or for group-term life insurance.
7) Feed Purchases - Expenses for feed that was consumed by the livestock in the current year, including prepaid farm supplies. Prepaid farm supplies are amounts paid during the tax year for feed, seed, fertilizer, and similar farm supplies not used or consumed during the year. Prepaid farm supplies do not include any amount paid for farm supplies on hand at the end of the tax year that would have been consumed if not for a fire storm, flood, or casualty, disease, or drought. Deduct the expense for prepaid farm supplies that does not exceed 50% of the other deductible farm expenses in the year of payment.
8) Fertilizers and lime - Cost of fertilizer, lime, and other materials applied to farm land to enrich neutralize or condition it.
9) Freight and Trucking - Costs of freight and trucking. DO NOT include the cost of transportation incurred in purchasing livestock held for resale.
10) Gasoline, fuel and oil - Cost of gasoline, fuel and oil used for farming.
11) Insurance - Premiums paid for farm business insurance. DO NOT deduct amounts credited to a reserve for self-insurance or premiums paid for a policy that pays for the farmer’s lost earnings due to sickness or disability.
12) Interest - Interest paid to banks or other financial institutions for a mortgage on farmland or other obligations incurred in the farm business. If the proceeds of a loan are used for more than one purpose (for example, personal and business), allocate the interest on that loan to each use. Only allow the portion of the interest payment that is the farm expense.
13) Labor Hired - Amounts paid for farm labor. DO NOT deduct amounts paid to the owner of the farm. Allow reasonable wages or other compensation paid to the children or the spouse of the farmer if a true employer-employee relationship exists. DO NOT deduct wages paid to hired help for the construction of new buildings or other items.
14) Pension and Profit-Sharing Plans - Contributions made to employee pension, profit-sharing, or annuity plans for employees of the farm. DO NOT include contributions made for the self-employed farmer.
15) Rent or Lease Payments - Business portion of the rental cost for rented or leased vehicles, machinery, or equipment. DO NOT deduct rent for property which the farmer will receive equity in or title to.
16) Repairs and Maintenance - Amounts paid for repairs and maintenance of farm buildings, machinery, and equipment. This includes the cost of tools of short life or minimal cost, such as shovels and rakes. DO NOT deduct repairs or maintenance on the farmer’s home.
17) Seeds and Plants Purchased - Costs of seeds and plants purchased for further development and cultivation before sale. DO NOT deduct the purchase price and seeds and young plants for Christmas trees and timber.
18) Storage and warehousing - Costs for storage and warehousing.
19) Supplies purchased - Costs of supplies and materials used in the farming. DO NOT include inventory that is maintained for sale.
20) Taxes - Taxes paid by the Farm. This includes real estate and personal property taxes on the farm business assets, Social Security and Medicare taxes paid to match what was required to be withheld from farm employees’ wages, federal unemployment taxes, and federal highway use taxes.
DO NOT deduct federal income taxes, including self-employment tax; estate and gift taxes; taxes assessed for improvements such as paving and sewers; taxes on the home or personal use property and state and local sales taxes on property purchased for use in the farm business; or other taxes not related to the farm business.
21) Utilities - Amounts paid for gas, electricity, water, etc., for business use on the farm. DO NOT include personal utilities. DO NOT deduct the base rate (including taxes) of the first telephone line into the farmer’s residence, even if used for business.
22) Veterinary, Breeding, and Medicine - Veterinary, breeding and medicine costs.
23) Other Expenses - Other necessary farm expenses such as advertising office supplies, cost of qualified clean-fuel vehicle property, legal and professional fees, etc. DO NOT include fines or penalties paid to a government for violating any law.
Note: You may allow expenses for business use of the home only if the home is used exclusively and regularly for the administrative or management activities of the farm and there is no other fixed location where the farmer can conduct these activities. If part of the home is used for business, determine the percentage of the home that is used regularly and exclusively for business purposes. Allow the same percentage of the expenses association with the home. These expenses include utilities, deductible mortgage interest, real estate taxes, and casualty and theft losses.
4. Using Income Tax Forms to Determine Countable Self-Employment Income:
Use the most recent income tax return to determine the countable profits from self-employment if the information on the tax return is representative of the current self-employment income and circumstances.
A. What Forms to Use
The tax form or forms used to determine countable profits depends on the type of business. They are as follows:
1) Sole Proprietorship - Schedule C, Profit or Loss From Business (non-farm) or Schedule F, Profit or Loss from Farming.
2) Partnerships - 1065, U.S. Partnership Return of Income; Schedule K-1 (Form 1065), Partner’s Share of Income, Credits, Deductions, etc.; Schedule E, Supplemental Income and Loss.
3) S Corporations - 1120 S, U.S. Income Tax Return for an S Corporation; Schedule K-1 (Form 1120S); Schedule E, Supplemental Income and Loss
B. Computing Countable Income
Deduct 40% of the gross income from the tax form for allowable business or farm expenses. If the tax form shows that the actual expenses of the self-employed individual is more than 40%, then use the expenses reported on the tax form. The same expenses that are allowed by the IRS can be used as business expenses.
Sole Proprietorship:
1) To use the 40% disregard for allowable business expenses:
a. Determine the monthly countable self-employment income by starting with the gross income. Gross income is the amount posted on line 7 of the Schedule C, Profit or Loss from Business, for self-employment other than farming. For farm income, the amount posted on line 11 of the Schedule F, Profit or Loss from Farming, is the gross income.
b. Multiply the gross income by 40%
c. Subtract this figure from the gross income.
d. Divide the remainder by 12 to arrive at the countable monthly self-employment income.
EXAMPLE: Mr. Jones is the sole owner of a cleaning business. The schedule C shows that the gross income of the business was $20,000. His monthly countable self-employment income is $1,000.
a) Line 7 on Schedule C = $20,000
b) $20,000 x .40 = $ 8,000;
c) $20,000 - $8,000 = $12,000 ;
d) $12,000 / 12 = $1,000
2) To use actual expenses:
a. Determine the monthly countable self-employment income by starting with the net income. For self-employment other than farming, net countable income is the amount posted on line 31 of Schedule C, Profit or Loss from Business. For farm income, the net countable income is the amount posted on line 36 of the Schedule F, Profit or Loss From Farming.
b. Divide the net income by 12 to arrive at the monthly self-employment income.
EXAMPLE: Mr. McDonald is a self employed farmer. The Schedule F shows that the net income of the farm was $15,000. His monthly countable self-employment farm income is $1,250.
a) Line 36 of Schedule F = $15,000
b) $15,000 / 12 =$1,250
Partnerships: Use this policy only if the individual is a general partner. If the individual is a limited partner, the total amount of income distributed to the individual is countable unearned income. See 401-2 #2B for information on how to determine countable income for a limited partner.
1) To use the 40% disregard for allowable business expenses:
a. Determine monthly countable self-employment income by starting with the gross income. Gross income is the amount on line 8 of the form 1065, U.S. Partnership Return of Income.
b. Determine the partner’s share of the income according to the Partnership agreement, or if no partnership agreement exists, divide the gross income by the number of partners.
c. Multiply the partner’s share of the gross income by 40%.
d. Subtract from the gross income.
e. Divide this amount by 12 to arrive at the monthly self-employment income.
EXAMPLE: Ms. Mason is one of 3 general partners in a daycare business. The partnership agreement states that Ms. Mason will receive 50% of the profits from the business. Ms. Mason’s countable monthly self-employment income is $1,000.
(a) Line 8 of form 1065 = $40,000
(b) $40,000 x .50 = $20,000
(c) $20,000 x .40 = $8,000.
(d) $20,000 - $8000. = $12,000
(e) $12,000 / 12 = $1000
2) To Use Actual Expenses:
a. Determine the monthly countable self-employment income by starting with the net income. For both regular partnerships and farm partnerships, the amount posted on line 31 of Schedule E, Supplemental Income and Loss is the net countable income.
b. Divide this amount by 12 to arrive at the monthly self-employment income.
EXAMPLE: Mr. Miller filed a Schedule E with his federal income tax return after receiving a Schedule K-1 from “Miller’s Ski Shack” in which he is a partner. Mr. Miller’s monthly countable self-employment is $1,000
(a) Line 31 of Schedule E = $12,000
(b) $12,000 / 12 = $1,000
S Corporations:
1) To use the 40% disregard for allowable business expenses:
a. Determine monthly countable self-employment income by starting with the gross income. Use the amount posted on line 6 of the Form 1120S, U.S. Income Tax Return for an S Corporation as gross income.
b. Multiply the gross income by 40%.
c. Subtract from the gross income.
d. Multiply by the percentage of profit the shareholder is entitled to. (Use the percentage shown on Line A of the Schedule K-1)
e. Divide by 12 to arrive at the monthly self-employment.
EXAMPLE: Ms. Johnson is a shareholder of “Jeremiah’s Tours”. His Schedule K-1 shows he is entitled to 50% of the income. The corporation’s total earnings for the year were $20,000. Mr. Johnson’s monthly self-employment income is $500
(a) Line 6 of form 1120S = $20,000
(b) $20,000 x .40 = $8,000
(c) $20,000 - $8,000 = $12,000
(d) $12,000 x .50 = $6,000
(e) $6,000 /12 = $500
2) To use actual expenses:
a. Determine the monthly countable self-employment income by starting with the net income. The net income is the amount posted on line 17 of the 1040, U.S. Individual Tax Return, or the amount posted on line 31 of Schedule E, Supplemental Income and Loss.
b. Divide this amount by 12 to arrive at the monthly self-employment income.
EXAMPLE: Mr. Conners is a shareholder in “Conner’s Candies”, an S Corp. He received a Schedule K-1 from the Corporation which he used to complete a Schedule E for his income taxes. His monthly self-employment income is $666.67.
(a) Line 17 on 1040 (or line 31 on Schedule E) = $ 8,000
(b) $8,000 / 12 = $666.67