Determining Self-Employment Income 430-05-30-57-20

(Revised 04/01/14 ML 3400)

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Amended IM 5192

1. Capital or Ordinary Gains or Losses – A capital or ordinary gain or loss is the difference between the sale price and the cost basis. The cost basis may include improvements and sales expenses such as broker’s fees and commissions.

Capital or ordinary gains or losses are considered part of the EARNED

income from self-employment. The gain or loss is calculated by

deducting the cost basis from the gross sale price. The result is then

added to or subtracted from the calculation of the self-employment

Income for the business the property was used in.

NOTE: Use only the income or loss from the sale of capital items that can be reasonably anticipated to recur during the current year.

This income is generally included on the Schedule D or Form 4797.

2. Farm Income – Income earned through the operation of a farm or ranch including farm rental income and CRP.

1. Farm Rental Income – Income received by a landowner from the sale of crops or livestock produced by the tenant. This does not include cash rent of pasture or farmland.
2. Conservation Reserve Program Payments (CRP) – Cost share and payment program under the USDA that encourages farmers to convert highly erodible crop land or other environmentally sensitive acreage to vegetative cover.

Farm income, including farm rental income and CRP:

• Is considered EARNED income when the individual is actively engaged in farming. The total farm income or loss is determined by taking the taxable amount of cooperative distributions (patronage dividends) from the net farm income and adding in the depreciation.

The amount of cooperative distributions is deducted from farm

income as it is considered unearned income. Depreciation is

added back in as this is not an allowable expense.

This income is generally included on the Schedule F.

• Is considered UNEARNED income as a result of self-employment when the individual is NOT actively engaged in farming. The total farm rental income or loss is determined by taking the taxable amount of cooperative distributions(patronage dividends) from the net farm rental income and adding in the depreciation.

The amount of cooperative distributions is deducted from farm

rental income as it is considered unearned income on a separate

line in the calculation. Depreciation is added back in as this is

not an allowable expense.

This income is generally included on the Form 4835.

3. Business Income – Income earned through the operation of a business other than farming or ranching.

Business income is considered EARNED self-employment income.

Business income is determined by taking the net business income

profit or loss and adding in the depletion or depreciation.

Depreciation and depletion are added back in as they are not

allowable expenses.

This income is generally included on the Schedule C.

4. Partnerships – A partnership is a self-employment business set up as a partnership with two or more partners. A partner’s share of income, gain, loss, deductions or credits is determined by a partnership agreement.

• Ordinary income and guaranteed payments to partners in a partnership is considered EARNED self-employment income. This income is generally included on the Schedule K-1 (Form1065). The partner’s share of the partnership income is determined by adding the partner’s share of depreciation or depletion to their ordinary income and guaranteed payments. Depreciation and depletion are added back in as they are not allowable expenses. The depreciation and depletion are generally included on the Form 1065.
• Rental, interest and dividend income paid to partners in a partnership is considered UNEARNED income as a result of self-employment. The partner’s share of the partnership income is the total of the rental, interest and dividend income. This income is generally included on Schedule K-1 (Form 1065).

5. Other Rental Income – Income received from the cash rental of property.

Other rental income is considered UNEARNED income as a result of

self-employment. Rental income is determined by taking the total net

rental income from all rental properties and adding in the depreciation

or depletion. Depreciation and depletion are added back in as these

are not an allowable expense. This income is generally included on

Schedule E.

6. Royalty Income – a percentage of gross or net revenues derived from the use of an asset or a fixed price of a unit sold of an item. Income individuals receive from royalties is considered UNEARNED income as a result of self-employment. Royalty income is generally included on Schedule E.
7. Cooperative distributions (patronage dividends) - are paid by cooperatives in cash or shares of stock. These dividends are similar to rebates paid based on the amount of goods bought or services used for the self-employment enterprise.

Income individuals receive from cooperative distributions or

patronage dividends is considered UNEARNED income as a result of

self-employment. Cooperative distributions or patronage dividends are generally included on Schedule F and Form 4835.

8. S –Corporation – a separate business entity with 1 to 100 shareholder(s) that passes through the net profit or loss to their shareholder(s). The business profits are taxed at individual tax rates on each individual shareholder’s income tax.

Income shareholders receive from a corporation is considered

UNEARNED income as a result of self-employment. This income is

generally included on the Schedule K-1 (1120S). The shareholder’s

income is determined by adding the shareholder’s share of

depreciation or depletion to their ordinary business income, net rental

real estate income, interest income and dividend income.

Depreciation and depletion are added back in as these are not an

allowable expense. Depreciation and depletion are generally found on the Form 1120S.

NOTE: An owner or employee of a corporation is not a self-employed individual because the business income and liabilities belong to the corporation, not the individual. Wages that an owner or employee receive from a corporation are considered EARNED income.

9. Estate or Trust Income – Income received from an estate or trust. Income individuals receive from estate or trusts is considered UNEARNED income as a result of self-employment. Estate or trust income is generally included on Schedule E.