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Effective: March 1, 2009 | |
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20.25.20.05 - MinnesotaCare Self-Employment Income |
Calculating self-employment income for MinnesotaCare (MCRE) differs for each type of self-employment business. Some deductions from self-employment income are allowed and others are not.
This section provides information on how to calculate the self-employment income for MCRE. Additional general self-employment income information can be found in Self-Employment Income.
Non-Allowable Self-Employment Business Expenses - MCRE.
Partnerships and S-Corporation Calculation.
Use the MinnesotaCare Income Worksheet (DHS-3352) and the Tax Form Reference Guide to help identify where to find required information on the tax forms, and as a guide through the calculation.
Non-Allowable Self-Employment Business Expenses - MCRE
Do not allow the following business expenses to be deducted from gross receipts. If they are deducted on tax forms or other business records they must be added back to net profit or loss of a self-employment business when calculating household income.
The business expenses that are not allowed are:
l Depreciation A federal income tax deduction for the cost of a business asset that gradually loses value through the wear and tear of use..
Note: Do not add non-deductible depreciation back to the net profit, or loss, reported on the tax forms. This is generally recorded on tax form Schedule C for self-employment such as in-home day care providers
l Amortization A deduction for costs of starting a business that is deducted from the business income over a period of time..
Exception: Section 179 expenses are allowed. Deduct Section 179 expenses from depreciation before adding depreciation back to the net profit or loss.
l Carry forward net operating loss (NOL) A federal tax deduction used when allowable business deductions exceed gross receipts for the tax year. The business loss may be carried over into future years. for non-farm businesses.
Note: Do not add back NOL to farm income.
l Capital gain Profit from the sale or exchange of business or personal assets. An asset owned and sold within a year is a short-term capital gain. An asset owned for more than one year is a long-term capital gain. or loss Loss from the sale or exchange of business or personal assets. An asset owned and sold within a year is a short-term capital loss. An asset owned for more than one year and sold is a long-term capital loss..
n Do not allow a deduction for a capital loss unless it resulted from a sale, distribution, or exchange that occurred within the same tax year the deduction is claimed.
n Count capital gains as income if they result from sale or other gain on a business asset.
n Do not count capital gains from the sale or exchange of personal assets.
l Wage deductions paid to adult members of the MinnesotaCare household or minor children. These wages must be counted and may or may not be recorded on a W-2 form.
Note: Deductions for wages paid to other employees of the business are allowable.
The income calculation for a person self-employed by a C-Corporation follows the general provisions in Self-Employment Income. Use the shareholder's A person who owns shares in a publicly held company. wage reported on the W-2 and dividends paid.
Partnerships and S-Corporation Calculation
The self-employed income of a partnership or S-Corporation is added to the household’s other income to determine the household income total.
l If a business is no longer operating, subtract the self-employment income from that business from the household's other income.
l If allowable business expenses exceed gross receipts, deduct the self-employment loss from other household income, including other self-employment, gross wages, and gross unearned income.
To determine the self-employment income, follow these steps:
1. Use tax forms or business records to determine how to begin the calculation.
Note: See Determining Gross Income – MinnesotaCare for information on when to use tax forms or business records.
Note: See Income Changes for information on how to determine income when there has been a change.
If using:
l Tax forms (always use if available).
n Use the adjusted gross income (AGI) to arrive at income for self-employment.
n Do not allow the MCRE non-allowable business expenses.
l Business records.
n Request records for the previous 12 months or since the business began, whichever is less.
n Deduct all allowable business expenses for tax purposes from gross receipts.
n Do not allow the MCRE non-allowable business expenses.
n Average the net monthly income by dividing the result by the number of months represented by the business records to obtain a monthly average.
2. Determine the percentage of each person's share of profit, deductions, and loss. This will vary depending on the percentage of the business they own. To determine the percentage if the K-1 Form is:
l Provided: Use the percentage shown on the K-1 form to determine the individual’s share of depreciation and any other non-allowable.
l Not provided: Use the terms of the original partnership or corporate agreement to determine the applicant's percentage.
Example:
George, a MCRE applicant, is a partner in a small business with Sam. Because Sam contributed a larger share of the initial investment, and both work full-time for the business, Sam owns 60% of the partnership while George owns 40%. Each receives a K-1 form showing his share of the partnership's income. The form indicates that the amount reported for George, $15,000, represents 40% of the business profit. The partnership's tax forms show a $5,000 depreciation deduction.
Action:
Add $2,000 (40% of $5,000) to George's K-1 share for a self-employment income of $17,000.