NESE is determined on a taxable year basis. The yearly NESE is divided equally among the months in the taxable year to get the NESE for each month.

Any verified net losses from self-employment are divided over the taxable year in the same way as net earnings. Then each month's net loss is deducted only from other earned income of the individual or spouse in that month.

For taxable years beginning after 1989, a 7.65 percent deduction is applied to net profit in determining NESE. Therefore, net profit is multiplied by .9235 to determine NESE. (See SI 00820.220 for where to find the correct NESE amount on the Federal income tax forms.)

NESE is earned income for title XVI purposes without regard to the minimum and maximum amounts creditable for title II coverage purposes.

The title II optional method of computing NESE for farm and nonfarm businesses CANNOT BE USED.

Only the actual net earnings are used in determining NESE for title XVI.

NESE is earned income for title XVI purposes regardless of whether the earnings are exempt from Social Security coverage.

Any distributive share (whether or not distributed) of income or loss from a trade or business carried on by a partnership is included in NESE, unless specifically excluded per

RS 01802.300 - RS 01802.375.

NESE may include in-kind income (e.g., food, clothing, shelter, a car, etc.). In-kind income from NESE is valued at its current market value (SI 00835.020).

Divide the entire taxable year's NESE equally among the number of months in the taxable year, even if the business:

• •

  is seasonal;

• •

  starts during the year;

• •

  ceases operation before the end of the taxable year; or

• •

  ceases operation prior to initial application for SSI.

A period of less than 12 months may be a taxable year if:

• •

  the basis for computing and reporting income changes (e.g., fiscal to calendar year); or

• •

  the taxpayer dies (the taxable year ends on the date of death, and net earnings are computed as of the date of death.); or

• •

  the taxable year is closed by the Commissioner of IRS.

1. a. 

   General

   Divide any verified net loss for a taxable year evenly over the months in the taxable year.

2. b. 

   Individuals

   Input the verified monthly net loss from self-employment to the system on the ISEI screen. The system will subtract each monthly net loss amount from the individual's other earned income (NESE or wages) in the same month.

3. c. 

   Couples

   The system cannot automatically apply a net loss from self-employment to a couple's record when both members of the couple have earnings that will be offset by the net loss. These cases are MSSICS exclusions. Compute these cases manually. Input the net loss from self-employment on form 1719b. Apply the monthly net loss first to the member of the couple who incurred the loss. Then apply any balance of the monthly net loss to the earned income of the spouse.

   In couples cases where there is no leftover net loss from self-employment to apply to the spouse, follow the instructions for an individual in SI 00820.210B.2.b.

If an individual is self-employed (whether or not he/she is also a wage earner), reduce his/her earned income by any allowable work expenses which have not already been used to compute NESE. (See SI 00820.545B.1. for necessary work expense development.)

When an individual alleges (or you discover) that cash or in-kind items are withdrawn from a business for personal use, proceed as follows:

1. a. 

   Ask the individual whether the withdrawals were properly accounted for in determining NESE. That is, were they either deducted on the individual's Federal income tax return in determining the cost of goods sold or the cost of expenses incurred, or deducted on his business records?

2. b. 

   Accept the individual's allegation of whether the withdrawals were properly accounted for.