(Revised 10/00 ML #2629
Earnings from self-employment should normally be evaluated by reviewing the most recent IRS forms. However, in some cases using the IRS return may not be the best indicator of income. The business may have only recently been established so that the federal income tax return for the previous year does not reflect a full year's operations. Similarly, termination or severe reversal of the business may require special considerations in evaluating income available to pay heating costs. In these cases, income should be evaluated as follows:
- Business Not In Operation Complete Calendar Year
The applicant will need to provide records of monthly business income and monthly expenses in order to estimate monthly business profit. Total the profit of all months and divide by the number of months of operation to find the average monthly profit. Annualize by multiplying the average monthly profit by 12.
If the business has some expenses which do not occur monthly, it may be easier to estimate annual business income by using SFN 1906 (See 415-25-05-25-10 number 5).
- Partial Liquidation Of Business
- If a business sells some land, equipment, or other capital items to obtain money for current operating expenses and/or pay off a loan, but does not expect a substantial reduction in his self-employment income as a result of the sale, continue to look at the most recent income tax forms.
- If the business liquidates a large enough portion of the business to result in an anticipated substantial reduction in the self-employment income, the income tax forms must be appropriately adjusted to accurately anticipate the current year's income.
Using the most recent IRS schedule C (business) or F (farm), review Part I (income) and subtract from total receipts any income attributable to the part of the business being liquidated. Similarly, subtract from the total of Part II (deductions) any expenses relating to the liquidated portion of the business. Now, subtract the remaining expenses from the remaining income and add back in the depreciation to arrive at an anticipated income for the current year of the unliquidated portion of the business.
If the estimated income is substantially different than the income shown on the most recent IRS forms, use the estimated income for LIHEAP purposes. If there is not a substantial difference, use the most recent income tax forms without adjustments.
Capital gains/losses on sale of property are counted as income.
- If the business expects to liquidate partially but has not done so yet, use the most recent IRS forms in their entirety until the liquidation takes place.
- Severe Reversal Of Business
A farm/business may suffer severe reversals which are expected to be temporary and do not result in a liquidation of business (e.g. crop loss due to hail, etc.). However the reversal is expected to result in a significant reduction in income which may not be reflected on the most recent tax forms.
In these cases, one of the following methods should be used:
- The applicant may choose to have an estimated tax return prepared for the current business year, including at a minimum the IRS forms used in the LIHEAP self-employment computation guide for business income.
- If the applicant is involved with lenders (FmHA, banks, PCA, etc.), the lender often prepares documents (such as farm plans) showing the current year's anticipated income and expenses. These documents may be used to arrive at current year's anticipated income. The "Anticipated Self Employment Worksheet" (#5 below) may be used as an additional guideline when using information from lender's documents. Anticipated capital gains/losses on sale of property are counted as income.
If the applicant does not choose to use one of these alternatives, the most recent tax forms must be used without adjustments.
- Termination Of Business
- If a business expects to completely liquidate but has not done so yet, continue to use the most recent IRS forms or one of the methods described in #3 above until the business has liquidated.
- If a business has been completely liquidated, tax forms cannot be used to evaluate the applicant's income available to purchase fuel. Use only whatever income is available on the current basis from other sources.
- Self-Employment Alternate Worksheet
If the current IRS forms are not representative of the current financial situation of small businesses and farms, Form 1906, "Anticipated Self Employment Worksheet" may be completed and signed by the applicant in lieu of using IRS forms.
