4.2.5 Calculating IM Income

4.2.5.1 IRS Tax Forms

4.2.5.2 Worksheets

4.2.5.2.1 Depreciation

4.2.5.3 Anticipating Earnings

Calculate IM income Income is anything you receive in cash or in kind that you can use to meet your needs for food, clothing, and shelter. (4.2.1.4) by either:

1. Using IRS tax forms completed for the previous year, or

2. Anticipating earnings (4.2.5.3).

4.2.5.1 IRS Tax Forms

Don't fill out any IRS tax forms (or the Self-Employment Income Report Form- DES 2131 ) yourself.  This is the responsibility of the client.

Consult IRS tax forms only if:
 

1. The business was in operation at least one full month during the previous tax year, and
    

2. The business has been in operation six or more months at the time of the application, and
    

3. The person doesn't claim a change in circumstances since the previous year.

If all three conditions aren't met, use anticipated earnings (4.2.5.3).

4.2.5.2 Worksheets

If you decide to use IRS tax forms, use them together with the self-employment income worksheets   ( HCF 16034 , HCF 16035 , HCF 16036 and HCF 16037 ).

The worksheets identify net income and depreciation by line on the IRS tax forms.

For each operation, select the worksheet you need and, using the provided tax forms and/or schedule, complete the worksheet.  These are:

1. Sole Proprietor - Farm and Other Business
    

2. 1. IRS Schedule C ( Form 1040 ) – Non-farm Business Income

   2. IRS Schedule E ( Form 1040 ) - Rental and Royalty Income

   3. IRS Schedule F ( Form 1040 ) - Farm Income

   4. IRS Form 4797 - Capital & Ordinary Gains

2. Partnership
    

3. 1. IRS Form 1065 - Partnership Income

   2. IRS Schedule K-1 ( Form 1065 ) - Partner's Share of Income

3. Corporation
    

IRS Form 1120 - Corporation Income

4. Subchapter S Corporation

1. 1. IRS Form - 1120S - Small Business Corporation Income

   2. IRS Schedule K-1 ( Form 1120S  - Shareholder's Share of Income

Next, divide IM income by the number of months that the business was in operation during the previous tax year.

The result is monthly IM income.  Add this to the fiscal test group's other earned and unearned income.  If monthly IM income is a loss, add zero to the non self-employment income.  

When a household has more than one self-employment operation, the losses of one may be used to offset the profits of another.  Apply this offset only to those self-employment operations that produced earned income.  Don’t apply a loss from unearned income to a gain in earned income.  Losses from self-employment can’t be used to offset other earned or unearned income.  

If you use more than one worksheet because there is more than one operation, combine the results of each worksheet into one monthly IM income amount before adding that total to any other income.  Remember that while a salary or wage paid to a FTG member is an allowable business expense, you must count it as earned income to the payee.

Continue to process the group through the balance of the handbook, including some additional work-related expenses that IRS doesn't allow as business expenses (4.1.3.5),(4.1.3.6).

4.2.5.2.1 Depreciation

EBD cases must deduct depreciation from their self-employment income.  The amount of the depreciation deduction is the same as the amount they claim on their tax forms.

For Family Medicaid, do not allow the following deductions when calculating gross self-employment income:

1. Depreciation (also called depletion or amortization).

2. Transportation to/from work.

3. Purchase of capital equipment.

4. Payment on the principal of loans for capital assets or durable goods.
    

If using an IRS form (4.2.2.2) provided by the client, add depreciation back into the net income indicated on the form. The reason is the IRS allows depreciation as an income deduction but Family MA does not.

4.2.5.3 Anticipated Earnings

If past circumstances don't represent present circumstances, calculate self-employment income based on anticipated earnings.  A change in circumstances is any change that can be expected to affect income over time.  It is the person's responsibility to report changes.

The date of an income change is the date you agree that a change occurred.  You must also judge whether the person's report was timely to decide if the case was over or underpaid.  Changes are then effective according to the normal prospective budgeting cycle.  Don't recover payments made before the agreed on date.

Other instances when you would use anticipated earnings:

1. The business wasn't operating at least one full month during the previous tax year.

2. The business wasn't operating six or more months at the time of the interview.

The Self-Employment Income Report Form ( SEIRF ) (DES 2131) simplifies reporting income and expenses when earnings must be anticipated.  It's modeled after IRS Form 1040, Schedule C, and can be used to report income for any type of business with any form of organization.  However, some, especially farm operators, may find it easier to complete the IRS tax form when income and expense items are more complex.

To compute anticipated earnings, the person must complete a SEIRF for those months of operation since the change in circumstances occurred following the guidelines below  (remember, the beginning of a business is a change in circumstances).  S/he may complete the SEIRF for each month separately or combine the months on one SEIRF.

When a new self-employment business is reported or when a change in circumstance occurs and the past circumstances no longer represent the present, recalculate self-employment income:

1. When two or more months of actual self-employment information is available, calculate a monthly self-employment net income average using all of the actual income information beginning from the date self employment began or the date of the significant change.  See example 1.
    

2. When at least one full month but less than two full months of actual self-employment income information is available, calculate a monthly net income average using the actual net income received in any partial month of operation, the one full month of operation and an estimate of net income for the next month. See example 2.
    

3. When there is less than one full month of actual income information available, calculate a monthly net self-employment income average using the actual net income received in the partial month (since the change in circumstance occurred) and estimated income and expenses for the next two months. See example 3.

Use the average until the person's next review or if a significant change in circumstances is reported between reviews.

Use the anticipated earnings amount until the person completes an IRS tax form or reports a change in circumstances .

This page last updated in Release Number : 07-05

Release Date: 07/10/07

Effective Date: 07/10/07