Treatment of Income 430-05-30-55-10

(Revised 01/01/04 ML2893)

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The following procedures apply to self-employment income.

 

Garnishments

Any amount garnished is not excluded. The total gross income is counted in the income computation.

 

Conservation Reserve Program Payments (CRP)

CRP payments are considered self-employment income and are annualized.

 

If the individual is actively managing the property 20 hours per week the payment is counted as earned income. Normally this occurs in the first 1 to 2 years of the CRP contract.

 

If the individual is not actively managing the property 20 hours per week the payment is counted as unearned income.

 

Expenses are allowable costs of doing business that are claimed on the tax return.

 

Equipment is excluded from asset consideration as long as the individual plans to continue farming after the 10-year period.

 

Non-Recurring Lump Sum Payments

All non-recurring lump sum payments are counted as assets in the month received, unless specifically excluded by Federal law.

 

If an individual is required by a lender to liquidate some of their land and turn the proceeds over to the lender, the proceeds are a non-recurring lump sum payment and are not counted as income.

 

This provision applies only to the sale of land, and only when total payment for the land is received in a single payment. It does not apply to proceeds from the sale of capital goods and equipment or to the sale of land when payment is received in installments.

 

Proceeds from the Sale of Property

• If an individual sells equipment and the proceeds are diverted to a bank to repay a loan, the money from the sale is counted as income to the individual.
• If an individual voluntarily turns over collateral to a bank and the bank sells the collateral to pay off a loan, proceeds of the sale are not counted as income to the individual. Once the collateral is turned over to the bank, it becomes the legal property of the bank.
• If an individual holds title to property and sells the property, any gain from the sale is counted as income to the individual, calculated as follows:

Sale price minus the acquisition price plus any amount depreciated. Sales expenses such as broker’s fees and commissions are allowed.

• If an individual gives title to the bank or if the property is repossessed prior to sale and the bank sells the property, the proceeds are not counted as income to the individual.

 

Installment Contracts or Contracts for Deed

Installment contracts or contracts-for-deed for the sale of land or buildings are excluded as an asset if the contract is producing income consistent with its fair market value.

 

When a household applies and is receiving a payment from a contract, the worker must establish if there is a capital gain.  Capital gains are arrived at by taking the selling price and subtracting from it the original purchase price, any improvements made and sales expenses such as a broker’s fees and commissions.  Capital gains from last year are counted as income only if they are expected to recur in the current year.  

 

Once this determination is made, the household must be asked to provide an amortization schedule for the payments they will receive.  Generally, payments on contracts are paid either biannually or annually.

 

If there is a capital gain, the total amount of the capital gain must be annualized as unearned income.  

 

If there is no capital gain, the interest portion of the payment on the contract is annualized and counted as unearned income.  The principal portion of the payment is not counted as there is no capital gain.

 

Debt Write Off

If a lender is unable to collect on an individual loan, the lender may write off all or part of the outstanding balance.  The portion written off is not counted as income to the individual.

 

Annualizing Income

Self-employment income that represents a household's annual income must be annualized over a 12-month period of time, even if the income is received within a short period of time during those 12 months. Self-employment income is annualized even if the household receives income from other sources in addition to self-employment.

 

If the averaged annual amount does not accurately reflect the household's actual monthly circumstances because of substantial increases or decreases in business, the worker must calculate the self-employment income based on anticipated earnings. It may be helpful to review a cash flow plan that is prepared by a lender, FSA, or a bank. These plans anticipate income and expenses and can be used in conjunction with completion of the Food Stamp Anticipated Self-Employment Worksheet.

 

Examples:

Changing from a grain and cattle operation to a cattle operation only, adding or reducing a quarter of cropland, natural disaster such as hail or drought.

 

Normal year to year fluctuation in market prices is not considered a substantial change in business.

 

If a self-employed enterprise has been in existence for less than a year, the worker has the option of averaging the income over the period of time it has been in operation or using monthly income and expense ledgers. If a household is certified for less than a year, the certification period should coincide with the month the household will be filing a tax return.

 

Exception:

Self-employed individuals who work only part of the year to supplement their income from regular employment during the balance of the year must have their self-employment income averaged over the period of time it is intended to cover rather than a 12-month period.

 

Example:

An individual may be a self-employed painter during the three summer months and works as a housekeeper for regular wages the rest of the year. The self-employment income from painting is averaged over the three summer months because it is intended to meet the individual's needs for only part of the year.

 

Determining Monthly Income

The gross self-employment income (including capital gains), minus the allowable costs of producing the self-employment income is calculated by one of the following methods:

 

• Divided by 12 months.
• Divided by the number of months the business has been in operation, if less than a year.
• Monthly, if monthly income and expense ledgers are used.

 

For households where there has been a significant increase or decrease in the operation, self-employment income is anticipated and averaged. Capital gains anticipated for the next 12 months are added to the anticipated income, minus the allowable costs of doing business and the total divided by 12. If a household reports a significant change in operation, a new averaged amount is calculated and used.

 

The monthly net self-employment income is added to any other household income.

 

Exception: 

If the cost of producing self-employment income exceeds the income derived from self-employment as a farmer or rancher, such losses are offset against any other countable income in the household. A self-employed farmer or rancher for this special consideration must receive or anticipate receiving annual gross proceeds of $1,000 or more from the farming or ranching enterprise. This offset applies only to farmers or ranchers.

 

Calculating Anticipated Crop Income

The only time anticipated crop income is calculated is when the household had a crop loss in the prior year and anticipates planting some or all of the same land again this year. Calculating anticipated crop income is only done if line 8b of Schedule F contains an entry.

 

Example:

If line 8b is $8493.00 and represents an 88% crop loss and the farmer did not harvest the remaining 12% and again intends to plant the land, $9651.14 is an appropriate anticipated income entry ($8493 ) .88 = $9651.14).

 

If the farmer did harvest the remaining 12%, $8493 is counted as anticipated crop income and the 12% harvested crop is already counted in the gross proceeds.