TN 7 (01-07)
DI 10510.012 Determining Countable Income
A. General — Countable Income
Evaluation of a self-employed person’s work activity for SGA purposes is concerned with only that income which represents the person’s own productivity. Therefore, before comparing the income of a self-employed individual to the earnings guidelines in DI 10501.015, it is necessary to ascertain what portion of the individual’s income represents the actual value of the work he or she performed. This requires that the value of certain assistance and certain items and expenses be deducted from the individual’s net earnings from self-employment. The portion of the individual’s income remaining after the applicable deductions represents the actual value of work performed. This amount is referred to as “countable income”. The countable income is the amount which is counted for purposes of determining the issue of SGA and is, therefore, compared to the earnings guidelines in DI 10501.015.
B. Policy — Determining Countable Income
First determine the individual’s net earnings from self-employment (NESE). An amount reported under the optional method (see RS 01803.160 and RS 01803.180) is not the actual net income, nor is it reported as such for purposes of Federal income tax. Therefore, a copy of the tax return should be obtained for any year in which the actual net income is pertinent.
Once the NESE is determined, deduct:
the value of any significant amount of unpaid help furnished to the self-employed person by a spouse, children, or others;
impairment-related work expenses (if not already deducted from gross income as a business expense);
unincurred business expenses paid for the self-employed person by another individual or agency; and
soil bank payments if they were included as farm income.
Do not deduct any other category of earnings.
1. Unpaid Help
The reasonable monetary value of any significant amount of unpaid help furnished by a spouse, children, or others should be deducted from the net income. Obtain facts which would permit an estimate of the reasonable value of unpaid help furnished by family members or others. When it is clear that the help rendered consists of miscellaneous duties carried on in connection with the person’s general activities as a member of the household or as a friend, a statement to this effect will be sufficient, and no estimate of value will be necessary (e.g., a farmer’s children feed a small flock of chickens or tend a home garden). On the other hand, where the help furnished is of a nature to which commercial value would ordinarily be assigned, the following type of information should be obtained:
The name of the helper and the person’s relationship to the self-employed individual;
The reason unpaid help was furnished;
A full account of the services rendered, the amount of time furnished, and how long the arrangement existed;
An estimate of the reasonable value of the services, on the basis of prevailing remuneration for that type of work in the community (the FO’s own knowledge and observations may be sufficient, or inquiries at informed sources in the area may be necessary);
If the help was furnished by a spouse or by a child under age 18, an explanation of how the previous pattern of such individual’s activities was affected, if at all.
In estimating the amount to be deducted for unpaid help, consider the prevailing wage rate in the community for similar services. Where the unpaid help is rendered on a part-time or intermittent basis, only the pro rata value attributable to the services actually performed (as compared with those that a full-time employee would perform) should be deducted.
Mr. J., a former automobile mechanic, became seriously impaired as a result of an accident. Through the services of a rehabilitation agency, he opened a candy and cigarette counter in January 2005 in the lobby of an office building. He ran the business as a self-employed individual and was able to serve customers, make change, and perform the various other duties connected with the business. However, once a day he needed help in restocking the shelves. Mr. W., a janitor in the same building, donated an hour of his time each day, without pay, to perform this service for the claimant. In estimating the amount to be deducted from net income, we considered the prevailing local rate of $7.25 an hour for this type of help. Hence, although Mr. J.'s net reportable income for income tax purposes was $11,100 a year (or an average of $925 a month), the deduction of approximately $145 per month for unpaid help resulted in “countable income” of not more than $780 per month for 2005. Therefore, it was determined that his monthly “countable income” did not average more than the SGA amount of $830 per month for calendar year 2005.
2. Impairment — Related Work Expenses
If not already deducted from gross income as a business expense, impairment-related work expenses will be deducted from the net earnings from self-employment to determine countable income. See DI 10520.000 for the policy on impairment-related work expenses.
3. Unincurred Business Expenses
In the course of doing business, a self-employed person ordinarily incurs (i.e., becomes liable for) normal business expenses. These incurred expenses, whether paid by the self-employed individual or by someone else, are deducted from the individual's gross income in order to determine net income. In some instances, however, an individual with a serious impairment may be aided in establishing or sustaining a business by a rehabilitation or other agency or another person. For example, a sponsoring agency or another person may incur responsibility for and pay certain business expenses for the individual (e.g., rent, stock, purchase and repair of equipment, etc.). In addition, in some situations there may be no actual expense specifically incurred and paid by anyone for things provided the self-employed individual (e.g., the disabled or seriously impaired person operates a business in a building used by a government agency and the agency incurs no additional expense for the space or utilities it provides the individual).
In order to determine “countable income” in such cases, deduct from the individual's net income any business expenses which were incurred and paid by another person or agency. Also, deduct the value of things provided the disabled or seriously impaired individual even though no actual expense was incurred and paid by anyone for the things provided the individual. The method of determining the deductible amount in this type of situation is dependent upon the kind of things provided the self-employed person. For example, when space and utilities are provided, ascertain the fair rental value of the space and utilities provided. When items (e.g., cash register, fax machine, personal computer) are provided, use a system comparable to the depreciable method used by self-employed persons for income tax purposes, i.e., depreciate the items over their useful life and deduct the share of depreciation attributable to a given taxable year. This policy is consistent with the principle that only income attributable to an individual's own productive work activity should be considered in determining SGA. It is also analogous to the policy on unpaid help, discussed above, which makes it possible for a disabled or seriously impaired individual to have a higher income than he or she would ordinarily have by virtue of his or her own work activity alone.
The following information must be obtained when the self-employed individual uses things in the business that another source paid for or provided:
The name of the individual or agency that paid for or provided things, and the relationship of that person or agency to the self-employed individual;
The reason the things were paid for or provided;
A full account of the things paid for or provided, the amount of expenses paid or value of things provided, and the period during which the things were paid for or provided.
4. Soil Bank Payments
Soil bank payments are received by a farm operator for land withdrawn from production and placed in the conservation reserve program under the Federal Soil Bank Act. These conservation reserve payments are included in computing net earnings from self-employment. Since these activities are quite limited as compared with regular farming operations, soil bank payments will not be indicative of the extent of the management function involved in the total enterprise. Evidence from the individual should show whether any of his or her farm income includes soil bank payments, and the extent of such payments, unless income tax returns for the periods in question contain this information. If the farmer did include any soil bank payments as income, those payments should be deducted in determining “countable income” for SGA purposes.
5. Distributing Countable Income Over the Period Worked
Since self-employment income may fluctuate widely due to transitory business conditions, changes in the nature and size of the business, improved methods of operations, etc., the self-employed person is less likely than an employee to have a record of monthly earnings which can be readily compared to the earnings guidelines. To determine monthly earnings in these cases, distribute the individual’s countable income over the period worked and divide by the number of months in that period. When comparing the monthly countable income to the SGA thresholds, you must separately consider periods of work when there is a significant change in work patterns or income, or a change in the SGA earnings threshold.