Self Employment Takes Center Stage Virginia Department of Social Services May 2019

Agenda Overview Definitions MAGI Groups and Family and Children Medically Needy Groups Aged, Blind, Disabled Groups Verifications Business Expenses Self Employment Monthly Income Projection Tax Return Sample Scenario

General Definitions Self-employment: A business, farming or commercial enterprise in which the individual receives income earned by his own efforts including his active engagement in management of property. Self-employment situations include but are not limited to domestic workers, day care providers, including babysitters and chore and companion service providers. (M0720.200)

General Definitions Profit from self-employment means the total income received less the allowable business expenses directly related to producing the goods or services and without which the goods or services could not be produced. (M0720.200)

General Definitions Business Expenses are expenses directly related to producing goods or services and without which the goods or services could not be produced. (M0720.200 and M0440.100)

General Definitions-ABD Net Earnings from Self Employment(NESE) The gross income from any trade or business less allowable deductions for that trade or business. NESE also includes any profit or loss in a partnership (S0820.200)

General Losses F&C-- If the losses exceed income the resulting amount will be zero for MN. ( A negative dollar amount offsets other countable income for MAGI). (M0440.100) ABD--Any verified net losses from self employment are divided over the taxable year in the same way as net earnings. Then each months net loss is deducted only from other earned income of the individual or spouse in that month. (S0820.210)

General Verification An individual reporting self employment must provide documentation of business expenses and income i.e., proof of gross amount of income and proof of business related expenses. (M0720.200)

General Verifications IRS HUB Tax return IRS 1040 Schedule C or C – EZ Schedule E (Expenses from rental income) Schedule F (Farming expenses) Business Records Customer records, bookkeeping Self Declaration Written statement (M0720.200, M0440.100, S0820.220)

Allowable Expenses F&C MAGI and MN Payments on the interest of the purchase price of and loans for capital assets such as real property, equipment, machinery, and other goods of a durable nature. Insurance premiums Legal fees Expenses for routine maintenance and repairs Advertising costs Bookkeeping cost (M0440.100, M0720.200)

Expenses Not Allowable MAGI and F&C MN Payments on the principal of the purchase price of and loans for capital assets such as real property, equipment, machinery , and other goods of a durable nature. Principal and interest on loans for capital improvements of real property. Net losses from previous periods Federal, state, and local taxes Personal expenses, entertainment expenses, personal transportation. Money set aside for retirement purposes (M0440.100, M0720.200)

Expenses MAGI VS F&C MN MAGI Only: F&C Medically Needy Only: Depreciation and capital losses ARE allowable expenses F&C Medically Needy Only: Depreciation of equipment, machinery, or other capital investments necessary to a self employment enterprise are NOT deducted in calculating profit from self-employment for groups that are not subject to Modified Adjusted Gross Income(MAGI) methodology. (M0440.100, M0720.200)

Projecting Self Employment Income After allowable expenses are deducted from the total self-employment income, the remaining profit is annualized (divided by 12) to arrive at the monthly countable earned income amount. (M0720.200) I changed the title of the slide to Projecting Self Employment?? I think the way you have it now is

ABD-NESE-Verification Federal Income Tax Return--specific schedules: Schedule SE Net earnings--Section A, line 4 or Section B, line 4.C. NOTE: If line 4 or 4.C. shows a positive amount of less than $400, then line 3 is used, even if the amount on line 3 is greater than $400. For example, line 3 shows $410 and line 4/4.C. shows $378. Line 3 should be used because no tax was due. Net loss--Section A, line 3 or Section B, line 4.C. Schedule C--Line entitled "Net Profit or Loss." Schedule C--EZ—Line entitled "Net Profit" Schedule F--Line entitled "Net Profit or Loss." (S0820.220)

Net Profit Deduction-NESE After 1989, a 7.65 percent deduction is applied to net profit in determining NESE. Net profit is multiplied by .9235 to determine NESE. NOTE: This deduction recognizes, as a business expense, part of the Social Security taxes paid. If Social Security tax is not paid (e.g., in situations involving less than $400 per year in NESE, net losses, and when no tax return was filed), the deduction does not apply. (S0820.210)

NESE-Deductions Business records--Assume that any deductions taken on business records are allowable per IRS, absent evidence to the contrary. Do not apply the 7.65 percent deduction in determining countable NESE, unless you have evidence that a tax return was filed and Social Security taxes were paid on the NESE. (S0820.220)

NESE Deductions Schedule C, C-EZ or F: Do not apply the 7.65 percent deduction in determining countable NESE, unless you have evidence that Social Security taxes were paid on the NESE. Individual's Signed Allegation: Do not apply the 7.65 percent deduction to the alleged amount of NESE in determining the countable NESE unless you have evidence that Social Security taxes were paid on the NESE. (S0820.220)

ABD-NESE-Monthly Projection NESE is determined on a taxable year basis. The yearly NESE is divided equally among the months in the taxable year to get the NESE for each month. Divide the entire taxable year's NESE equally among the number of months in the taxable year, even if the business: is seasonal; starts during the year; ceases operation before the end of the taxable year; or ceases operation prior to initial application for Medicaid. (S0820.210)

NESE-Work Expenses If an individual is self-employed (whether or not he/she is also a wage earner.), reduce his/her earned income by any allowable work expenses. (S0820.210) If the cost of an item has been deducted in computing net earnings from self employment, it cannot be deducted again as a work expense. Work expenses must be verified and documented. Examples: Blind Work Expenses (BWE) and Impairment Related Work Expenses (IRWE) (See S0820.545 B for development of work expenses.)

NESE-How to Estimate Current Year's Estimate Based on Prior Year's Profit Gross-Net Ratio Projecting Partial Year's Profit for Whole Year Individual's Estimate Current Year's Estimate Varies from Past Records (See chart in S0820.230 for specific steps for applying each method.)

Salary-Corporation If an individual has incorporated a self-employment enterprise either alone or with other persons (such as an “S-corporation”), and he draws a salary from the corporation, the wages drawn are regular earned income; they are NOT self-employment income. The person's share of the net worth of the corporation is a resource. (M0720.105)

Tax Form Sample-Income

Tax Form Sample-Expenses

Scenario-VaCMS

Scenario-VaCMS

Scenario-VaCMS

Scenario-VaCMS

Scenario-VaCMS

Scenario-VaCMS

System Limitations VaCMS does not have an option for depreciation as an expense. If you use “other allowable” and document for a MAGI Case, you must remember to remove this expense if running eligibility for other programs as the system will allow when not appropriate per policy.

System Limitation (Cont.) VaCMS does not offset other income by the amount of the loss from self employment income. Enter all other income in VaCMS. Deduct the loss from the self employment income from other income to determine the countable amount. Document the computations and results in VaCMS. Perform an override on affected individuals.

Documentation Document your case to support the income used in the eligibility decision: Type of self employment income Verifications used Expenses allowed/not allowed Resolution of any discrepancies Method of computation if completed outside VaCMS

Wrap Up Questions?

Contact: Julia Clingempeel, Piedmont Regional Medicaid Consultant or Sandy Blevins, Western Regional Medicaid Consultant Division of Benefit Programs