5164-2        SELF-EMPLOYMENT COSTS OF DOING BUSINESS

Allowable costs of doing business are determined using either the self-employment standard deduction or actual allowable expenses.  The caseworker must give the household the choice of using actual expenses if they believe their expenses exceed the amount allowed using the standard deduction.  If the household chooses to use actual expenses, they must provide verification of the expenses.

• Using The Self-Employment Standard Deduction as Cost of Doing Business

The self-employment standard deduction is 50% of the estimated gross self-employment income.  

Example:

Joe is self-employed as a carpenter.  His gross self-employment income is $2,000 per month.  The allowable costs of doing business is $1,000 ($2,000 x 50%).  Joe’s adjusted gross self-employment income is $1,000.

• Using Actuals as Cost of Doing Business

If the household claims their self-employment expenses are higher than the 50% of their gross self-employment income, they may claim actual expenses as their cost of doing business.

5164-2 A.   EXPENSES ALLOWED AS COSTS OF DOING BUSINESS

Allowable costs of doing business include, but are not limited to:

1. Labor, including gross wages for an employee, employee life and health insurance premiums, and mandatory employer contributions to employee benefit plans such as Unemployment Insurance and Social Security.
    

2. Payments made to a self-employed helper, such as costs for contracted work, shares paid to a self-employed crewmember, etc.
    

3. Stock and inventory, including the actual amount plus tax of a product purchased for resale.
    

4. Raw materials.
    

5. Interest paid on loans to purchase durable goods.
    

6. Insurance premiums, taxes, assessments, and utilities for income-producing property.
   
   If the household's home is used as the place of business, a percentage of the mortgage interest, insurance, taxes, and utilities can be allowed as a cost of doing business.  To be allowed these costs, the self-employed individual must provide a description of the portion of the home used in the business, proof of the gross amount of the expense(s), and a reasonable method for estimating the proportion of expenses attributed to the business (such as percentage of use, amounts claimed under IRS Internal Revenue Service rules, etc).
    

7. Service, maintenance, and repair of business property and business equipment.
    

8. Rental of business property and equipment.
    

9. Business supplies.
    

10. Advertisements.
     

11. Licenses and permit fees.
     

12. Legal or professional fees, such as fees paid to lawyers and accountants.
     

13. Business travel, including costs incurred by self-employed individuals to travel outside their community to work, sell goods or services, purchase business equipment, or seek repair of business equipment.  Transportation to or from work is not an allowable cost of doing business.
     

14. Purchase of non-durable items.
     

15. Vehicle expenses.
    
    If a vehicle is used more than 50% of the time for self-employment reasons, allowable business-related expenses include gas, oil, registration and licensing fees, insurance, interest (but not principal payments) on vehicle loans, necessary service and repairs, and replacement of worn items (such as tires).  Do not allow vehicle depreciation as a business expense.
    
    If a vehicle is used less than 50% of the time for self-employment, allow the business mileage rate permitted by the Internal Revenue Service.  Refer to the standard mileage rate chart below for current standard mileage rates.  This allowance includes all business-related vehicle costs; no other vehicle-related expenses are deductible.  To receive the mileage allowance, the self-employed individual must provide reasonable documentation of their business-related mileage.  Refer to http://www.irs.gov/taxpros/article/0,,id=156624,00.html for current standard mileage rates.

16. Year-round boat moorage.
     

17. Utility costs to maintain the boat year-round.
     

18. Crew food and crew transportation, if paid by the self-employed individual.
    
    If the cost of food for crewmembers is not identifiable, the allowable cost is determined by prorating the total cost of food by the number of individuals fishing on the boat.  The result is the prorated cost for each individual.  If food expenses are deducted from the amount paid to a crewmember, the amount deducted is not allowed as a cost of doing business to the boat operator.
    
    A food deduction is not allowed for the self-employed individual or for any member of the Family Medicaid household.

5164-2 B.   EXPENSES NOT ALLOWED AS COSTS OF DOING BUSINESS

Expenses not allowed as costs of doing business are:

1. The purchase price of durable goods.
    

2. Payments on the principal of loans to purchase durable goods.
    

3. Depreciation.
    

4. Net losses from previous periods.
    

5. Federal, state, and local income taxes.
    

6. Monies set aside for retirement purposes, except when paid for an employee.
    

7. Personal work-related expenses such as transportation to and from work and child or dependent care.  Transportation to and from work is included in the earned income deduction.  Child and dependent care costs are allowed under the dependent care deduction in the Family Medicaid budget.
    

8. Normal living expenses for the self-employed individual and his or her household, such as shelter and food.
    

9. Personal costs for the self-employed individual and his or her family, such as life and medical insurance and entertainment.